The Tax Deduction Myth

How many times have you, as a business person or as an employee been involved in a conversation with a friend or a colleague and the subject of tax breaks has come up? As a registered tax agent I can’t quantify the amount of times that a client has come to me and told me about the latest way that they have heard they can get a tax break. Usually told over a drink at the pub or some other social function. 

It amuses me because 9 times out of 10, the information they have been told is wrong. Not just wrong but “Geebus I will get fined heavily” if I do that wrong.  It begs the question of whether you would take “medical advice” from your mate down the pub? Bill is a plumber but he told me that I really need to fix my blood pressure and the way to do that is to eat 1 Kilo of Kale for lunch. Unlikely that would get a response other than “turn it up mate!”

This bring us to the question of tax deductions.  Tax deductions are great.  They allow us to use the tax system to partially fund necessary work purchases or investments.  There is a catch though. In order to get a tax deduction, you need to spend money. Assuming, like most Australians you are in the 32.5c to 37c plus Medicare tax bracket this means that to get that tax deduction you will be out of pocket. Even if you are at the top tax rate of 45c plus Medicare you will be out of pocket. It is simple math.

You spend $100 on a tax deductible item, the best you will get is $45 (plus whatever Medicare rate is relevant) back. So in effect you have $55 less in your pocket. This is all well and good if you needed the item. If it was essential to doing your job and you would have had to buy it regardless of the tax deduction.  However, if you did not need the item you have just done yourself out of $55.  If you did not buy the item, you would have paid $45 tax but would have been left with $55 to spend.  By buying the item you have the item and a credit from the ATO of $45. (less if your tax rate is less) So you are effectively $10 worse off at best.

So what is the take away from this? In my view, it is that you never make a decision with tax as the main or sole motivator.  The desire to minimise tax legally is a natural and good desire. It should not take precedence over other factors like need and cash position. Tax is one part of the puzzle and should be only one factor in the decision.

Also think about who you take advice from. Your mate down the pub will likely not have the same knowledge as your trusted advisor. However, keep asking about the latest scheme that you have heard about. As Accountants and tax agents we often need a laugh.

Article by Matt Tognini