EOFY 2020: How to not fall for tax time trap at end of financial year

An accountant explains why Aussies shouldn’t rush out and splash on end of financial year sales, leaving them thousands of dollars out of pocket.

Ignore those EOFY sales. Picture: William West/AFP

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.”

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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.”

Ignore those EOFY sales. Picture: William West/AFP

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.”

ANOTHER EXAMPLE

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.

$150K ALLOWANCE ‘DELIBERATELY MISLEADING’

Earlier this week, the government announced its $150K instant asset write-off scheme which was due to expire at the end of the financial year would now be extended until December 31.

The policy allows Aussies businesses to buy equipment, machinery or other goods for their business at a cost of up to $150,000 and to write it off right away.

Treasurer Josh Frydenberg said around 3.5 million businesses would benefit and that the program would cost $300 million.

However, Mr Johnston has issued a crucial warning to business owners, claiming the announcement was “deliberately misleading”.

“The investment allowance has been deliberately misleading in the way it has been marketed the whole time,” he said.

“Say the item of capital costs $100,000 – the business has always been able to claim that deduction and save $30,000 in tax, but the difference was they had to claim that $30,000 over the asset’s effective life.

“Now they still save that same $30,000, they just get to save it in the year they buy it.”

“We are constantly getting calls about the investment allowance from people thinking it is a dollar-for-dollar rebate, but you are just saving the same tax you always have – the only benefit is it is accelerating it into this year.”

Mr Johnston said while the idea behind the scheme was to encourage people to spend more and stimulate the economy which was important, he was concerned it was pushing people to spend money they can’t afford.

“The benefit of it is overstated because the business that outlays $100,000 saves $30,000 in tax, but is still out of pocket $70,000,” he said.

“The major retailers are spruiking it in their EOFY marketing as if you’ll be saving huge amounts of money but I’m worried people will be spending money they don’t need to, thinking they will get it all back.