Nearly the end of another financial year.   The TV ads have started, 'Beat the tax man', inciting you to buy something from them and so save tax.   Accountants then get calls like "Should I buy this before 30 June and save lots of tax?"

It depends!

If it is really needed now, there is an argument to make the acquisition before 30 June, but it is also necessary for businesses to understand the total cost of purchasing equipment.   Items not particularly needed now, especially if financed, should be evaluated by a cost/benefit exercise, which is a bit more complicated than knowing how much tax is saved.

Tax

This issue has become relevant because the April Budget provided that items costing less than $30,000 can be immediately deducted or written off against profits in this year (and will continue through to 30 June 2020).

Many business owners are motivated to spend because it will be a "tax deduction".   Some have a belief that they receive a refund of a dollar for each dollar spent, sometimes hinted at by the sales person, which is simply not correct.

The tax value of the purchase depends on the marginal tax rate of the payer; a company is 27.5%, individuals with incomes under $87,000 are 32%, and between $87,000 and $180,000 it is 42% (incl. Medicare).   So the tax saved on $30,000 is between $8,250 and $9,600.   That is a fairly modest tax saving for the amount spent.

Cash Flow

It's also not an instant benefit.   It just reduces the tax to pay when it is due 10 months after the end of the year, or even perhaps the final PAYG Instalment due in July.

That is, it's also important to look at the effect on cash flow, as well as the tax aspect.   (I said it gets complicated).

If the purchase is financed, the deal is important; term, interest rate, fees upfront, penalty for early payment, etc.   Take a $20,000 purchase over 60 months at 9% (plus fees).   The repayments are $415 a month, so a total $24,910 over the term.   The tax saved is $6,850 for a company at 27.5%, a little more for an individual paying 32%.   (The saving is 27.5% on the interest paid of $4,910 [$1,350] plus 27.5% on the immediate deduction claimed of $20,000 (or $5,500).

So the total cost of the purchase over the term of the finance contract is:

             Purchase                   $20,000

             Plus, Interest             _ 4,910

                                                  24,910

             Less, Tax saved         _ 6,850

             After tax cost          $ 18,060

And, we could also model the time value of money (didn't I say it can be complicated?) but at current low interest rates it is not going to make a material difference in this example.

Questions to Answer

The answer to the question of whether to buy before 30 June is not just how much tax is saved, but about the overall picture, considering:

- Is it value now (could it be purchased at a better price after 1 July)

- Is it needed now, and will it help improve profit in the future

- What is the tax rate likely to be for the current year

- If financed, what is the rate payable including fees

- Is cash flow next year (and beyond) sound enough to allow repayments without stress.

The Incentive has its place but its benefit is not just as a tax deduction, and as much about the expected cost and the return on investment on the money spent.