Come the End of Financial Year (EOFY), retailers roll out spend and save slogans en masse, aggressively spruiking sales that'll keep you from giving your hard earned dollars to the tax man. These thinly-veiled attempts to offload anything from smartphones to self-education subscriptions are, in most cases, giving your hard earned dollars to the retailer and leaving you, the taxpayer, with an EOFY-sized hole in your back pocket.
Before EOFY sales turned festive, the end of the financial year gave small businesses a moment to assess their income and potential profit, then plan accordingly. If a profit is looking likely and the business 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.
Where EOFY seems to have lost its way, is in the space where retailers skirt between legitimate and luxury. With the new financial year ticking over and the nation sobering up from the EOFY extravaganza, here's how you can manage your EOFY hangover.
Many EOFY campaigns paint an unrealistic picture, advocating that if an individual or small business spends $100, they'll get $100 back. While dollar-for-dollar deductions would be great, this isn't how tax refunds actually work. Say you paid $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. Similarly, if you are an employee and you require tools or other equipment to assist you with your employment duties, purchasing these items may result in a higher tax refund, but you will not get a dollar-for-dollar refund for your purchases.
Concessions for business taxpayers may allow you to claim a deduction if full for the purchase of assets used in your business.
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.
Think about it this way – you probably wouldn't take health advice from a chain-smoker, and for the same reason, you probably shouldn't turn marketing slogans into financial strategies. If a retailer promises you tax back, think again, it's all relative to your marginal tax rate and turnover.
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. Say you've bought a car or a computer – apportion the usage accordingly to avoid over or under claiming. That's where an accountant comes in.
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 which 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.
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.
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