The crazy world of business what should you buy, what items should you invest in your business, should you buy things just for tax deduction, or should you buy items for direct connection to making money in your business, let us shed some light on the most sort out topic of accumulating expenses just for a tax deduction, why does the Australian Tax Office provide this relief for Small businesses and not depreciate these assets over time?
What is an Instant Asset Write off?
Are items that you use in your business that are $30,000 and under and are used to produce assessable income.
Previous to these new tax laws items of more than a $1,000 were depreciated over time which meant that you only received a deduction for the portion that the item was depreciated by, which was a slow process, less spending on larger items meant that businesses in Australia could not access massive tax breaks, with this new law, you can instantly write off purchases to the amount of $30,000 previous to this it was $20,000, you will still have access to this write off until 30 June 2020.
Businesses with $10 Million or less turnover can still access this Instant asset write off. Purchases on items of up to $30,000 including GST are allowable items that can be instant write offs and do not need to be depreciated over time.
You will definitely make up your mind after this blog if you really need to purchase items for your business just for a tax deduction or so you can merely invest to produce income.
The main problem businesses face with such a decision is that main stream media and advertising channels make it sound so good and create offers that irresistible that no one can afford not to buy, what’s the catch? The catch is the media and advertising companies don’t really understand tax, however the consumer who sees it on TV or hears it on the radio says well if there saying it must be true, they’re not tax advisors, and the advice is not tailored to your needs, only believe less than half of what they promote, otherwise you may have a massive gap in your cash flow projections and or your profit and loss for year end.
We spend $30,000 the maximum amount you can write off, to have a reduction of $9,000 in your tax bill, does this make sense? It really only makes sense if you need the item you are going to buy, like a new PC, the odd tablet or Laptop, items that will produce income for your business, items that will sustain your business so you won’t go out of business.
After 10 years of being in business and 20 years of being in tax, most people believe that if you spend $30,000 you will receive a $30,000 refund, trying to explain how tax works is sometimes convoluted however it’s as simple as this, as a company you earn $1,000 then the tax rate currently is 30%, $1,000 * 30% = $300 that is your tax bill for a $1,000 earned, should you spend $500.00 of that on tax deductible items for example a tablet, then the reduction of tax is $500 * 30% company tax rate equals $150, therefore your tax bill at the end of the year with this simple illustration is $300 minus $150, the myth is that people think that they spent $500 on tax deductible items that they get the $500 in entirety back on the tax which is incorrect, the classic is when you talk to a salesperson its 100% tax deductible, what else could it be if it’s for work purposes? A 90%/10% not tax deductible, only very rarely do you see this in Australia and one example could be an Income protection policy adopting this 90 10 rule, and the reason they would adopt the 90% tax deduction and 10% not tax deductible is because you will receive your income protection payout tax free for the rest of your working life in the event of an accident.
You can safely assume that most items used for work purposes are tax deductible hence the above example is what you will pay in tax, 100% tax deductible means that the entire purchase is minus this from the income you make thus $1,000 less the $500 of the purchase, therefore your taxable income is $500, tax on $500 is times this by 30%, so your tax bill is $150, it’s as simple as that. Should you have not purchased the $500 item then your tax bill will be with no tax deductions so $1,000 times it by the tax rate of 30% and you have a $300 tax bill, its as simple as that, spend $500 to reduce your tax to $150 or don’t spend on the tax deduction and just pay $300 in tax, the two scenarios have the following as after tax profit.
The first when your purchasing the asset is $1,000 less purchase of $500 is $500 times it by the tax rate of 30% you are left with cash in pocket $500 less tax bill of $150 is $350 in your pocket, the second scenario is no deductions so no asset purchase therefore the results are $1,000 times it by the tax rate of 30% $1,000 less $300 you are left with a profit of $700 however no purchase, with both scenarios you see that you are left with exactly half if you purchase an item and double that if you don’t purchase the item, scenario one you have $700 as profit and scenario 2 you have $350 as profit, you should speak with your tax adviser before you make any major purchases so you wont be out of pocket at the end of any financial year, our clients never make this mistake as they always consult us before any major purchases as we follow their accounts on a quarterly or monthly basis and understand where and what position the business is standing at, you can book a time with us to see how we can help here.
What you should do?
Always consult your tax agent or tax advisor, if you see that you are provided with the wrong advice three times in a row, change your accountant.
Never buy a tax-deductible item just for the sake of buying it for a tax deduction.
Always purchase tax-deductible items with the intent that you need the item to keep on creating more taxable income or assessable income for tax purposes, and that the investment will flourish your business and not create a detriment.
Avoid being one of the businesses that do not know about the instant asset write off.
Only spend if you really need too.
Consult us if you need a second opinion.
If you need any other information please let us know and we are happy to write about it.
We are happy to help you if you need sound tax advice.