There are lots of items to check off your end-of-financial year to-do list. High on that list should be: don’t buy things just because you think it’s a tax lurk.
We’re all swamped in ads and catalogs urging us to snap up EOFY bargains, much of it of little benefit to your business. Here are few tips to avoid this trap:
Drop The Personal Tax Return Mindset
Tax deductions sound exciting. But applying personal tax return thinking to your business is an amateur mindset. It’s not a ‘tax deduction’, it’s an expense, and the more expenses you have, the lower your profit.
If the purchase is good for your business – it will help you generate revenue or lower costs – that should be the sole reason to buy it, not because you get a tax deal. Do you actually need a car, laptop or new office gadgetry right now?
Can You Actually Write It Off?
Recent tax changes for small business mean you can write off items under $20,000 as an expense. But not a car or other larger assets. Buy one for EOFY and you get a few days’ depreciation benefit – effectively nothing. You might also find that bargain isn’t actually a legitimate expense for your business, creating a ticking time bomb for future audits.
Embrace The Reality Of Tax
So many business owners are obsessed by tax, as if their entire success or failure depends on how many tax credits they can get. That’s a bad mindset. Our business pays lots of tax, and we’re fine with that because if you’re paying tax, your business is making a profit. Which is, after all, the whole point of a business.
You’re better off focusing on building your business than obsessing about a few deductions.
Set Up Tax Bank Accounts
A large percentage of startup failures are due to neglecting the reality of tax.When businesses go under, it’s usually because the tax office has given up throwing them payment lifelines, whether it’s GST, income tax, withholding tax or staff super. Owners tend to spend all their money staying afloat and their tax obligations rise to a level they can’t recover from.
The simplest, most effective approach is to set up multiple bank accounts and put a percentage of all revenue into one marked Tax. We work on 25-30%. Don’t even think about that cash being yours, it’s the government’s.
Avoid Premature Lifestyle Acceleration
It’s a classic business error to think you’re a high-rolling entrepreneur when the business gathers a bit of momentum. You see so many owners win a big new client, then rush out and buy success props like prestige cars instead of paying down debt and reinvesting on the business.
If you have a debt-free business and a manageable lifestyle, you’re free to make business decisions without fear. You end up with a much stronger business in the long term.
Ian Whitworth is the Co-Founder of Scene Change, a national corporate audio visual business.