People often ask us if it’s a good idea to spend money to save tax. The idea is by creating additional expense the business can claim the cost as an expense in the business income tax return. This does work but it depends on a few factors.
The key thing to understand is that when a business buys something it doesn’t “get back” the full purchase price via its tax return. The most it will save you is 33% and may be much less depending on income. The next thing to be clear on is income tax is only paid on profit, if there’s no profit, there’s no income tax to pay.
What happens when something is purchased it is often an expense to the business (not always though, see below). Making a purchase reduces the overall profit. As you pay tax basically on a percentage of profit, the tax will decrease in proportion. For example if you buy something for $100, your profit will be reduced by $100 and if you pay income tax at 33% then there will be $33 less tax to pay than if the purchase was not made, less if on lower tax rates.
Some things to consider…
Any item purchased that’s over $500 excluding GST becomes an asset. With an asset only depreciation can be claimed which may be a slow process with partial claims being made over several years. You could buy multiple items under $500 though, in separate transactions (if from the same supplier do so on different days too) so each purchase stays below the asset threshold. In general, services (e.g. accounting) are not assets.
Anything purchased must be business related and intended for the business to use in its activity.
Is the purchase something actually required? Just spending money to reduce tax may not be a great idea and potentially wasteful. The profit could be kept and tax paid which is often better than buying unnecessary things.
If there are suitable purchases to make then do so before the financial year ends (31 March for most businesses), so any claims can be made sooner rather than later.
Please keep in mind this is a brief overview and any tax advice should be sought from a professional advisor.