Why spending money to save on tax doesn’t make sense
We’ve all been there.
Standing around the barbie, listening to someone bang on about how little tax they pay.
But when you scratch the surface, you often find the reason they pay no tax isn’t due to clever fiscal management… it’s because they’re not making any money!
Paying tax is not necessarily a bad thing. For one, you get that warm inner glow from contributing to society. But more importantly, it means you’re making money.
Now let me be clear – as the late great Kerry Packer once said, if anyone is paying more tax than they should, “they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.”
For most people, tax is a significant outlay – so it makes sense to take steps to only pay your fair share. But too many people get caught up in the notion of ‘maximising their minimising’ – and in the effort to save a few dollars, perversely end up spending more.
Australia has a long history of tax minimisation ‘schemes’ – activities primarily focused on reducing tax rather than generating a return or acquiring an appreciating asset. Whether ostriches or trees, or a host of wacky schemes in between, Aussies have tried many and varied ways to get out of paying their fair whack.
But to what aim? The most a company will recoup on tax minimisation spending is 30c in the dollar (I’m excluding overseas multinationals here!); for individuals on the top marginal rate, that rises to 47c (less than half).
If you’re after a simple, guaranteed tax deduction, I’ve got just the thing – I can bill you! (Accounting fees are tax deductible.)
Regardless of whether you’re an individual looking to ramp up your wealth creation activities, or a business owner seeking greater profitability, you should always focus your spending on a primary income-generating purpose – any associated tax benefit should be secondary. I’d rather see my clients reinvest money back into their business, or purchase assets that will appreciate and generate an income (such as property or shares).
Speak to your accountant or business advisor about the many simple, smart and legit ways to reduce your tax bill – none of which require feeding or planting. Business owners should ideally schedule a tax planning meeting with their advisor between March-May, so you have time to make the necessary changes to give you the best tax outcome. Individuals should ask their accountant about deductions relating to the Concessional Superannuation Cap, Tools of Trade purchases, and Investment Property Depreciation.
Jason and The Practice team can be contacted via http://thepractice.com.au or (03) 8888 4000.