Whether you’re self-employed, a small business owner, contractor, consultant or freelancer, your inbox is vulnerable at the end of the financial year (EOFY). Many retailers turn to aggressive tactics to try to get taxpayers to spend more money, and it can be easy to get caught up in the hype.
The bottom line is – if you don’t need it, don’t buy it. There’s no tax deduction for irrelevant, impulse purchases.
Before EOFY sales turned festive, the EOFY gave small businesses a moment to assess their income and potential profit, then plan accordingly. If a profit is looking likely and the company needs to invest in assets or equipment legitimately, it can be beneficial to make those purchases before June 30 and claim the expenses in that financial year.
But it’s important to keep a level head when it come to the EOFY – and here are some useful tips to help you do this:
DON'T FALL FOR TRICKY MESSAGING
Many EOFY retail marketing campaigns imply that if an individual or small business spends $100, they’ll get $100 back. But this isn’t how tax refunds actually work.
If you pay $100 for a legitimately deductible item before June 30, The Australian Taxation Office (ATO) wouldn’t give you that money back. That $100 would come off your total taxable income and potentially reduce the amount of tax you pay. At the end of the day, if your small business is set to report a profit, spending a portion of that before the EOFY will help you pay less tax, but it won’t get you a dollar-for-dollar refund.
As a general rule, items costing $300 or less can be claimed in full as an immediate deduction. Items over the $300 threshold can only claim depreciation over the lifespan of the item. The ATO will determine how long you can claim depreciation (computers, for example, last up to four years).
DO THE MATHS
While there’s a place for legitimate EOFY spending, small business owners and individuals should always do the maths to make sure they come out on top. Retailers promising returns generally don’t know whether the laptop, sofa or software is genuinely suitable for your situation. Retailers have no visibility over your earnings or marginal tax rate, and while you may be getting 30% off that keyboard/mouse combo, it may have absolutely no benefit to your bottom line.
LOOK OUT FOR CROOKED CLAIMS
With access to thousands of data points, the ATO is very good at sniffing out suspicious returns. You may think that claiming your weekend wear as a uniform is no big deal, but the ATO will have a different take. The ATO takes over-claiming seriously, and if they catch up with you, you’ll be asked to pay the money back in addition to any penalties and interest charges.
When it comes to claiming expenses, be honest about whether the item is used for work purposes 100 per cent of the time. If you’ve bought a car or a computer, work with your accountant to apportion the usage accordingly to avoid over or under claiming.
BE WARY OF PREPAYMENT PLANS
Small businesses with larger clients will be all too familiar with this scenario: around June, some clients may ask you to bill them for work yet to be done. While getting paid for work you haven’t done sounds like a win-win – think again. Bringing invoices forward inflates your earnings, and in some cases, leaves the small business with a higher profit and a larger taxable income. While an EOFY cash injection is usually most welcome, always check with your bookkeeper or accountant before agreeing to anything.
REMEMBER THE BOTTOM LINE
When you strip away the bright lights and silly slogans, it’s quite simple. Tax deductions are designed to make sure individuals and businesses aren’t taxed on items and expenses that help them do business and earn an income. There’s nothing wrong with buying something you need at a reduced price and claiming a deduction. It’s when tax law and common sense get lost in marketing that we start to worry.
GET EXPERT ADVICE
When it comes to EOFY, there’s no one-size-fits-all advice. What works for you and your business might have disastrous implications for someone else.
There’s nothing wrong with planning for EOFY. In fact, we encourage small businesses and individuals alike, to be proactive about getting ready for tax time. What is wrong is thinking the ATO won’t realise the lawnmower you bought at 11:58pm on June 30 is not essential to the continued success of your business.
If you’ve burnt an EOFY hole in your back pocket and need help working out whether you can claim some or all of it, get in touch with our team of tax experts. Whether it’s online or in person at any of our 470 offices Australia-wide, we’re here to make sure you receive sound advice and the maximum refund possible.
Our H&R Block accountants are now working online. Book an appointment with an expert.