Don’t fall for this ‘stupid’ tax trap
An accountant has warned Australians not to be seduced by the end of financial year sales on the belief the expense can be claimed as a tax write-off.
Ben Johnston from Willett Johnston Partners said any unnecessary expense is bad for the individual's financial position, regardless of the percentage they can claim back on the purchase after the middle of the year.
He said the less needed to be claimed the better, imploring people not to confuse the 100 per cent tax deductible offer as a freebie.
"Tax deductions are a bit of a myth," he told news.com.au. "I actually really hate encouraging people to spend money to save tax because it's costing you money.
"They get caught up rushing out before the end of financial year, spending money to recoup tax and it's stupid.
"You should only ever spend money if you need to spend money to do your job. To fish out tax deductions should only be focused on what you were ordinarily going to be spending money on anyway."
Mr Johnston said Aussies should ignore the prevailing rhetoric from big retailers who splash the EOFY sale and the incentives from government, who are trying to stimulate spending during a downturn in the economy.
"At the end of the day you should only spend what you need to spend money on because you're only recouping some of that money back," he said.
"If your wage is $100,000 and it costs you $10,000 to do your job because you had to pay for your car and your own phone and your union fees and so on.
"You might look at it at tax time and say, 'This is brilliant, I'm getting a $4000 refund', but you're forgetting you had to outlay $10,000 to get back $4000.
"So you're $6000 out of pocket just to do your job.
"A public servant has hardly anything to claim because everything is provided - they might only get a couple of hundred dollars back but they're better off financially because it cost them nothing to do their job in the first place."
Mr Johnston said the major exception to this rule is outlaying money into your own super accounts.
"It's the only deduction where you're knowingly paying out extra money and saving tax but that super is your money.
"Anything else you spend on to chase money for a tax deduction is a waste of money."
A casual worker earning under $18,000 a year might have $500 worth of 100 per cent tax deductible expenses but they won't save any tax on those expenses as they have paid no tax.
And even if they had tax taken out of their pay during the year, they were going to get refunded all of that tax anyway because they earned under the tax-free threshold meaning the 100 per cent tax deductible expenses made no difference.
Effectively they are out of pocket $500.
BEN JOHNSTON'S EXCEPTIONS
• Superannuation is the only deduction that makes sense when considering the above because it's money that you pay out, save tax at your marginal rate and the money still remains yours
• Charitable donations could be looked at differently as you save tax, and sure you are out of pocket the net amount after tax savings, but you receive the "good will" or fulfilment of contributing towards a good cause.
• Negative gearing: This comes with the disclaimer that negative gearing and the benefits are hugely inflated and are in fact a fallacy, unless the asset that is geared is achieving capital growth.
If you are negative gearing and the asset is not accumulating in value you are going backwards, the tax saving in that instance just lessens the burden but you are losing money. You need capital growth.
Originally published as Don't fall for this 'stupid' tax trap