EOFY Planning – 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 out the reason they’re not paying 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.)
Always focus spending on a primary income-generating purpose – the 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).
That said, there are some simple, smart and legit ways business owners can reduce your tax bill (that don’t require feeding or planting):
10 ways to reduce your tax bill
*IMPORTANT: Speak to your accountant before taking any action*
1. Concessional Superannuation Cap
For people aged 49 years or over on 30 June 2014, the concessional superannuation cap is $35,000 per year, and $30,000 for those under 49. If you go over this limit, you’ll pay more tax.
2. Employee Superannuation Payments
Ensure your employee superannuation payments have CLEARED your business bank account by 30 June.
3. Asset Depreciation
If your business turns over less than $2 million:
- Depreciating assets (including motor vehicles) valued at less than $1,000 will be immediately deductible
- Depreciating assets valued at more than $1,000 will be depreciated in one pool at a rate of 15% in the first year and 30% in future years
4. Tools of Trade / FBT Exempt Items
The purchase of Tools of Trade and other FBT exempt items for business owners and employees can be an effective way to buy equipment with a tax benefit. Items include Handheld/Portable Tools of Trade, Computer Software, Notebook Computers, Personal Electronic Organisers, Digital Cameras, Briefcases, Protective Clothing, and Mobile Phones.
Buy these items before 30 June.
5. Defer Income
Where practical, defer issuing further invoices and/or receiving cash/debtor payments until after 30 June.
6. Bring Forward Expenses
Purchase consumable items (eg stationery, printing, office and computer supplies) BEFORE 30 June.
7. Motor Vehicle Log Book
Keep an accurate and complete Motor Vehicle Log Book for at least 12 weeks (start date must be on or before 30 June). Make a record of your odometer reading at 30 June, and keep all receipts/invoices for motor vehicle expenses.
8. Year End Stock Take / Work in Progress
If applicable, prepare a detailed Stock Take and/or Work in Progress listing as at 30 June. Review your listing and write-off any obsolete or worthless stock items.
9. Write-off Bad Debts
Write off all Bad Debts BEFORE 30 June, with a minute of a Directors’ meeting listing each Bad Debt as evidence these amounts were written off before year-end.
10. Investment Property Depreciation
If you own a rental property, ensure you have a Property Depreciation Report so you can claim the maximum amount of depreciation and building write-off deductions.