Should I buy an asset so I can write it off for tax?

There has always been such a buzz around writing off an asset for tax purposes. It even feels a little naughty knowing we can buy assets in our business and finally get one over the tax man by doing it just before 30 June.

This year is no different, especially since the government increased the instant asset write off for some eligible business’ to far greater than levels ever seen before (Checkout our blog on this exact measure)

During tax planning season, it almost comes natural as an accountant to address the instant asset write off, but this year, I wanted to go a bit deeper. Its one thing for an accountant to advise that there is a tax benefit to purchasing an asset, but does that mean it’s the right decision for your business? Lets take a deep dive.

Is there any other commercial reason or is it just for tax?

Let me just start by saying the first thing I learned as a junior accountant.

Never spend money to save money.

Sure, you got a small discount on the purchase price, but what you need to consider is that you are still out of pocket by the price you spent on the asset. Let me demonstrate, by comparing a business that buys an asset and writes it off and a business that doesn’t. Assume the business is a company and the tax rate is 27.5%.

For some odd reason, there has always been a common misconception that when you “writeoff” an asset, you are essentially wiping out your tax bill. As shown however in the example above, what is happening is that you are spending $20,000 on an asset to reduce your tax bill by $5,500. Whilst this is a nice saving of tax, would I recommend someone to spend $20,000 JUST to save $5,500? Absolutely not.

So if you shouldn’t buy an asset to save tax, then why would you buy an asset before 30 June?

That’s simple…. Because you actually need it and you were going to buy it around the same period, so instead of buying it after the financial year, you bring it forward prior to 30 June and get the tax write off this year, instead of the subsequent year.

But how do you know when you commercially need an asset and whether you should buy it?

What’s the return on my investment (ROI)

Think about this.

A basketball to me is worth roughly $10-$20. A basketball to Michael Jordan however, is worth $2.1 Billion.

A microphone to me is worth roughly $200. A microphone to Beyoncé is worth $400 Million.

Lets bring it closer to home.

A coffee machine to me is worth $5,000. But a coffee machine for a local café who relies on a coffee machine to produce its core product, is worth a heck of a lot more than 5k. With that investment, a café can bring in a return of hundreds of thousands, selling good quality coffee.

Enough with the analogies, what does this mean for your business?

Your money is limited, thus you need to look at any asset on its potential to bring you closer to your business vision AND return on the investment that you paid.

Ask yourself this,

is my money better off in the bank earning 1-3% interest, is my money better on the share market earning 3-8% OR is my money best spent on this new asset providing me with a 15-50% ROI OR can I find a better ROI on another asset?

Remember, capital is a limited. Make sure you spend it wisely.

Now that you’ve decided whether you actually need your new asset, its time to figure out whether your financials agree with you. That is, can you afford the asset you are trying to purchase?

Can you afford the asset?

When looking at this question, you actually need to consider 2 things, depending on which route you are taking.

1. Can I afford to pay in cash
2. Can I afford finance repayments

We aren’t going to get into whether you should finance or purchase assets outright in this article, we’ll save that for another day, as that’s a discussion in itself.

As the 2008 GFC and more recent Covid Crisis indicate. Don’t buy things your business cannot afford and make sure you have some sort of safety buffer….. just in case.

There are 2 accounting reports that will help you make the affordability decision pretty quickly and your accountant should be offering you both (contact us if they aren’t). One is a budget and one is a cashflow forecast.

The budget will tell you whether you have the profitability to spend money on assets or whether you need to make adjustments and wait it out until you have more sales/less expenses/profitability changes.

The cash forecast will tell you if you have the actual cash coming into the business to fund the repayments or if you have enough of a cash buffer to simply buy the asset outright.

Remember to look at how your financials will look both prior to purchasing the asset and what they may look like after you purchase the asset.

Final Thoughts….

Writing off assets purchased prior to 30 June is great from a tax perspective. However, you need to consider whether it’s a good commercial decision for the business. Ask yourself… Is this purchase getting me closer to the vision I have for my business or is my money better spent elsewhere. Your resources are limited, spend them wisely and NEVER spend money, just to get a tax deduction.

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