Why that “tax deduction” could be useless to you
The closer we get to 30 June and End of Financial Year – the more times I see the phrase “Buy now, so you can get a tax deduction this financial year”.
I truly wonder how many unsuspecting business owners get sucked into this sales tactic – when they don’t even know or understand their tax position in the first place.
“You see, a tax deduction is not the same as a tax reduction.”
What the heck am I talking about? Well, there are so many things to factor in when talking about reducing your tax bill. And certainly, don’t listen to some sales person in a store who has no idea about the tax office, who has been told to tell you the item you are purchasing is going to reduce your tax.
“If you buy now, the tax man will love you – one of the most inaccurate phrases sales staff use every single June. But it works – their sales numbers sky rocket.”
So what are my top five tips when considering that end of financial year purchase:
1. Is your business profitable? Now I know this sounds like a really obvious question – but the sales hype is addictive and those sales staff are really good at making you feel that you just can’t live without their item. And suddenly, you forget that you are making zilcho profit and therefore not paying tax in the first place – so really, there is no immediate tax benefit is you buying their item. Don’t let the hype overrule the facts.
2. Is it the best use of your money? Buying three computers just to get a tax deduction if you don’t need 3 computers just seems a little cray cray to me. I mean, if you need a way to offshoot some funds, book in for a Financial Coaching or Xero training session. Much more valuable than computers that you didn’t need in the first place. However, depending on your structure, paying yourself a higher wage could also make total sense (both financially and tax wise).
3. Is it really a tax deduction? Say what! Ask yourself if what you are buying is really a tax deduction. For example – prepaying your rent for the next 3 years – means a huge hit to your cash flow, but chances are the entire amount won’t be a tax deduction in this financial year. Making a donation to a charity which does not have deductible gift recipient status is not a tax deduction (no matter how much you believe and support the cause). So why risk it? This is why it is so so very important to speak to your tax agent BEFORE you make these decisions.
4. What is the true value of the tax deduction? That’s right folks – just because you spend $10,000 on something doesn’t mean that you are reducing your tax payable by $10,000. #truthbomb To understand the true value of the “tax reduction” you need to understand your structure type, as each structure requires a different tax calculation. Sole traders, for example, pay tax at individual marginal rates – the more you earn the more tax you pay, whereas companies have a set tax rate. Know your structure, understand what that means before going on that EOFY shopping spree.
5. What is so wrong with paying tax? No, I have not lost the plot. But, remember the good old days, when you used to work for someone else? You had a nice secure job, someone paid you consistently every month, and you lodged your tax return at the end of the year and if you were lucky, like magic, you may have even gotten a small tax refund. Well guess what – your employer was paying your tax for you the whole time. So now that you are a big, brave business owner – guess what you have to do? Pay tax. It is the same in theory it is just that before someone else dealt with it for you. Now, you are the one responsible – but paying tax is not a new concept. Give me profit, a healthy wage and paying tax over making a loss and having zero wage any day.
For your business to reach it’s goals, tax planning needs to be a strategy that you have in place.
You need to implement your tax planning strategy throughout the entire financial year…not just the last few days in June.
By having an amazing bookkeeper and accountant on your team, your yearly profit is not a magic number plucked out of thin air. This profit can be predicted in advance, planned for and the tax strategy adjusted if need be.