Turn on the TV as it nears June 30 and you will probably see dozens of ads suggesting you should buy something because it is tax-deductible. It sounds like a great proposition - buy stuff you may or may not actually need so you can reduce the money you hand to the ATO by increasing your tax deductions.
But here’s the thing - the money you claw back by increasing deductions is only ever a percentage of what you spent. No one is on a tax rate of 100 cents in the dollar! Here’s five things you and your small business accountant should consider when discussing tax deductions.
1. Consider if the tax deduction is worthwhile
As any good small business accountant knows, investing in something purely because it is deductible is not a great strategy. It’s a way of saving something on tax, but you will never get back as much as you spent. If you spend $1,000 on something you can deduct, it will generally only save you the applicable marginal tax rate on that $1,000.
So it pays to be smart about what you choose to purchase and recognise tax deductibility is a benefit, but should not be the entire reason.
2. Plan expenses with your small business accountant
There is a smart way to increase tax deductions for the current financial year and that is to look at which expenses you know you will have in the near future, and pay them in advance. For example, if you know you are going to have to invest in new equipment or procure specific services before December 31, if you can bring forward the spend to before June 30, you gain a tax deduction for the current financial year.
A good small business accountant can work with you to examine your forward planning and identify which line items can be ticked off now and what the tax advantages will be.
3. A good small business accountant knows not all dollars are equal
Just as a dollar invested in your business is not the same as a dollar spent on a holiday, the ATO has different rules and tax rates for various types of income and investments. Some are extremely advantageous in terms of reducing your tax obligations. Putting money you earn into super, for example, gains a concessional tax rate for that income compared to simply earning it and sticking it in the bank.
4. Your loans could provide tax deductions
By working with a good small business accountant to examine your current financing, you may be able to restructure your home and investment loans to convert some non-tax-deductible debt into tax-deductible debt.
If you end up paying less tax as a result, this also means you can pay down the non-deductible debt more quickly, and potentially gain a windfall in terms of paying less interest on that debt. That’s a double win!
4. Ask your small business accountant the right questions
When was the last time you asked your small business accountant what your options are in terms of Trusts? There are a number of ways Trusts can be beneficial in terms of reducing tax liabilities - so start the conversation!
While you’re at it, ask about doing some comprehensive tax planning, and get all your ducks in a row in terms of your obligations now, so there are no unpleasant surprises when your return gets lodged.
To learn more about tax deductions and how to use tax planning to maximise your share of every dollar you earn, download our free eBook ‘Your Money, Your Choice - Do Housekeeping’