As 30 June is fast approaching, we are seeing time and time again the words ‘Get in quick so you can claim a tax deduction this financial year.’
Great message if you actually need a tax deduction and a great message for your salesman who will probably receive a commission from your sale regardless.
However – a tax deduction and tax reduction are 2 very different things. Now I know there are many people out there who claim to know it all when it comes to tax and deductibility. But here is a hot tip – your tax advice should come from your accountant. Your friends, family, even your salesman are not the people you should be talking to when you are looking at ways to reduce tax.
If you are looking at making a purchase before 30 June consider these 5 tips before you pull out the cheque book.
- Is your business profitable? I am going to cut straight to the chase here. While the salesman might tell you that you can receive a tax deduction for whatever it is you are purchasing, if you business isn’t profitable there will be no immediate tax benefits from purchasing in the first place. Opt for the facts – not for the hype!
- I just spent $5000, why don’t I receive a $5000 refund? We see this all the time. It is a myth that if you spend a certain amount on a tax deductible item you receive the full purchase amount back. To truly understand the benefits of a tax deduction, you need to understand the legal structure of your business. A tax deduction creates a tax reduction. This is a reduction of the tax payable based on whatever your marginal tax rate might be. If in doubt, talk to your accountant before you head out on a shopping spree.
- Will this put a strain on my cashflow? If the purchase is going to put real pressure on your cashflow situation – don’t do it . This is particularly important to consider when the item might be ‘big ticket’ and needs financing. While a new tractor with all the bells and whistles might be tempting, if you need to sell your left kidney on the black market to pay for it – is it really worth it?
- Is this the best use of my money? Right – the accountant has told you that if you spend about $10000 it will reduce your tax bill buy about $2000. Cashflow is good. You decide to go and buy 4 laptops ‘just because.’ Is this a good use of your money? Unless the laptops in your office actually need replacing – than probably not. Think about what benefit you can get from your spend. If you tend to have periods where your business is particularly quiet and cashflow if tight, you might be better off pre-paying some of your expenses (rent, electricity etc) to ease the burden in those tough times.
- You could actually pay tax. Paying tax is not a bad thing! It means your business is profitable and you are making money. We would much rather see our clients making a profit than making a loss. Remember back when you worked for someone else? You did actually pay tax then, you just didn’t see it because your employer handled it through the PAYG system. Why should being in business be any different? I am sure no one ever went into business to lose money. If you ever decide to sell your business or borrow money from the bank you’ll need to show a reasonable profit. Change your mindset – paying tax is a GOOD thing, but let your accountant help you reduce it in ways that are useful to your business.
The best tax planners start early. It isn’t something they do in June (although this is when we pull it all together and line up our ducks). It is something they do all year round. We work in partnership with our clients to reduce the tax burden in ways that are going to benefit their business while taking into consideration what they are trying to achieve.
Remember – a tax deduction is only useful where it is actually needed and it isn’t going to cost you your left kidney!