Just as a shopaholic can’t resist the word ‘sale,’ many professionals find themselves enticed by the term ‘tax deductible.’ However, the mere fact that something is tax deductible doesn’t necessarily make it a wise allocation of resources.
Throughout June, retailers will actively promote their EOFY sales and remind you that laptops, smart phones, office furniture and more may be tax deductible. While this is a great time to purchase items you genuinely need, exercise caution when considering purchases solely for tax purposes. The potential tax benefits might not be as advantageous as you think.
At First Financial, we want to help you make good financial decisions this EOFY.
How it really works
Some people fall into the trap of thinking they will get their entire purchase back at tax time. That is not how it works. Tax deductible purchases will reduce your taxable income and consequently the tax you owe, but not to the full value of your purchases.
Let’s say you work full-time with a total yearly income of $95,000.
The estimated tax on that income is $21,342.
Now, suppose you purchase a printer for $100, noise-cancelling headphones for $110 and an office chair for $250. The total bill comes to $460.
Since all items are below $300, you can claim the full purchase price as a deduction, assuming you will be using the products solely for work purposes. (If they are partially for home use, you must apportion your claim accordingly.)
For purchases over $300, you would claim portions of the expense over the lifespan of the product, as they fall under the category of depreciating assets.
Now, let’s return to your EOFY shopping total of $460.That will reduce your taxable income to $94,540 and your estimated tax owed becomes $21,195.
You will get $147 back, but you are still out of pocket $313.
That’s an excellent outcome if you really needed the printer, the headphones and the office chair, but if you bought on impulse at an EOFY sale for the sake of tax deductions, the expenses incurred significantly outweigh the reimbursement.
Saving on things that help you earn a living
The tax deduction system exists to ensure you don’t pay tax on items that help you earn your income. It recognises that certain costs are necessary and unavoidable, and allows you to offset these costs. However, it is important to note that the keyword in this context is ‘offset’ rather than ‘eliminate.’
In addition, tax deductions for specific expenditures create an incentive for individuals and businesses to engage in spending, which leads to economic growth and charitable donations that benefit the community.
Should I buy things I need before June 30?
If the item will help you work or run your business more efficiently, and it falls within your financial capacity, it could be beneficial to buy now. There is a good chance that what you need will be on sale due to EOFY, which means you will save money on the total price and you will be able to claim some of it back with deductions.
To claim deductions for this financial year, you will need to make the purchase before June 30. Ensure you keep accurate records of your purchases, as you will require them for proof that you spent money and that it relates to earning your income. However, there are some record keeping exceptions. Always speak with your accountant or financial advisor to ensure you comply with all requirements for making tax deductible claims.
Eligible tax deductible items
Claimable purchases incorporate tools, computers and items you use for work. Some examples include:
- Tools and instruments
- Mobile phones and other devices
- Computers, laptops and software
- Landline and internet
- Bags and cases
- Stationery and office supplies
- Office furniture and equipment
- Books and periodicals
Speak with the experts
The best advice we can give you is speak with your accountant before you make any big decisions.
Essentially, if you are making a big purchase purely for the tax deduction, don’t do it. Spend wisely this EOFY. Don’t fall into the tax deductible trap. Yes, you will get some of the money back but not everything. And you may be stuck with items that you don’t really need.
At First Financial, we are here to help you plan a secure financial future. From tax-effective strategies to savings, we want you to be confident and retire life ready.
For financial planning services tailored to your unique circumstances, contact our experienced team today.
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