EOFY bargain or not?

It’s one month out from the financial year end. Mostly retailers and the media pumping-up buyers about purchasing prior to 30 June to get a tax deduction. I’ll always question the need to rush out and spend money now just to get a tax deduction. And contrary to some, you don’t ‘get it all back’.

Let’s look at an example:

If you make $100.00 and are on a tax rate of 30% (27.5% for small business), you pay $30.00 in tax and have $70.00 in cash. 

If you make $100 and spend another $20 on a tax deductible EOFY deal, your taxable income is now $80.00. You pay $24.00 in tax ($80 x 30%) and have a cash flow of $56.00 ($100-$20-$24).

The up-side is from a taxation perspective you have reduced your tax payable by $6.00.  However, from a cashflow perspective your purchase made you worse off by $14.00.

Looking at it another way, you are effectively receiving a 30% discount on the purchase price of the expenditure. If you think that is good value and you need it, go ahead and buy it. If you don’t need it or are cashflow poor, don’t buy it.  It might be better spent investing, such as paying down bank debt.

Need some help with cash flow or your business buying decisions? Give us a call at LJC Accounting.