Many clients ask us if they should spend money to purchase an item before 30 June to get the tax deduction for it.
The answer is simple – YES if you really need the item, and NO if you don’t.
Many times, people spend money on things just to get extra tax back, but it’s really a false outcome.
To explain: If your income is $75,000 then your marginal tax rate is 34% (including Medicare Levy). This means for every extra one dollar tax deduction you claim, you only get 34% of this back. So you’ve spent 66% after tax from your pocket for the item.
Even at the top marginal tax rate of 46.5% you still spend 53.5% of your cash on the tax deductible item you purchased.
Things to Spend on for Tax Deductions
If you’re looking for EXTRA tax deductions before 30 June 2016, firstly spend on all of the usual tax deductible items for your business. Examples include: printing, stationery, consumables, income protection and insurance premiums, prepayments of telephone accounts and rent (assuming you are a “small business taxpayer”).
Next, consider spending on items that CREATE WEALTH for you. These include extra superannuation contributions (up to the total $25,000 limit) and pre-payment of interest for income-producing assets such as shares, managed funds, and rental properties.
Things that are NOT good tax deductions
Sorry, motor vehicles are not a good year-end tax deduction. The Government only allows a relatively small portion of the cost of the vehicle and the cost of running the vehicle to be claimed as a tax deduction. If you’re considering purchasing a new vehicle, do it because you NEED it, rather than looking for an extra tax deduction. (Contact us for Motor Vehicle tax deduction advice to confirm what you will actually be able to claim.)
Even if you have a very high business use and you have kept the required motor vehicle log book for a 12-week period to confirm your high business use, the Government only allows you to claim depreciation on your vehicle up to the amount of $57,466, so if your vehicle costs more than this, then you can’t claim any depreciation over this $57,466 amount.
This article is provided as general information only and does not consider your client’s specific situation, objectives or needs. It does not represent accounting advice upon which any person may act. Implementation and suitability requires a detailed analysis of a client’s specific circumstances. © 2016 Refund Express Australia Pty Ltd