Three key ways to judge the value of a tax break
Wednesday, March 14, 2012/
We are almost in the last quarter of this financial year. So I’m going to get in early.
The closer we get to the end of the financial year, the more people will be out there encouraging you to spend your money, with the lure of the tax saving being one of the big selling points.
And the closer we get to the end of the financial year, the more focused business owners endeavour to keep their tax down and look at what opportunities there are to reduce it even further.
Keeping your tax down makes good sense. It is just plain dumb to pay more tax than you need to.
However, there is a balance between smart tax planning and throwing your money away on things that you really don’t need or that will add no real value to your business.
So, as the tax planning season gets into full swing, here are some tests to apply to the different buying opportunities presented to you.
If you are keen to take advantage of a tax break, make sure you ask these three key questions:
1. What will your spending do to your cashflow?
Every small business owner should recognise the importance of cashflow and availability cash funds.
Every time we make a spending decision we impact our cash position. Often we don’t go out there and make the big purchasing commitment.
There is a tolerance limit where people will be wary about that additional commitment.
Sometimes, though, we achieve the same outcome through a series of smaller buying decisions. They add up.
If you are going to purchase additional items or bring forward some of your buying to take advantage of the tax position, you need to know that you have the free cash to commit to this.
2. Does it add value to the business?
Saving tax alone is not a good enough reason to commit to additional expenditure.
That tax saving only cushions the cost, it does not remove it. The value of the tax deduction to you is your marginal tax rate.
If you operate through a company then that is 30 cents in the dollar. At an individual level it will be your marginal tax rate – at worst 46 cents in the dollar.
Know what the value of the tax saving is, look at the after tax cost and then make sure the expenditure is justified and will add value to your business.
3. Does it come with any risks and are you committing to ongoing expenditure?
Some of the buying options presented to you will have an ongoing commitment.
They provide some tax relief now but also lock you in to future commitments. If this is the case you need to ensure that this will work not only today but also into the coming years.
Measured against these tests, some of the purchases that you may consider in the coming months just will not stack up.
And if this is the case then you are better to pay the extra tax and keep the after tax dollar in your pocket.
Having said all of this, there will be opportunity for you to save tax and do some smart tax planning as we run up to June 30.
Test your decisions and if you are not sure get some advice on what you are considering.
And if you are on the other side of the transaction and are trying to encourage your customers to spend more, then it’s a good idea to have a few more value propositions than just the tax saving.