So now small business owners get a $20k tax deduction…

But before you open up your chequebooks (or god forbid extend your debt) and buy that new item you previously didn’t know you needed with money you potentially don’t have….here are some things to consider.

1. The items in the Budget 2015 still have to get Royal Assent.  Meaning these anticipated changes are just that – anticipated.  So don’t rely on the budget just yet (and some things may never become fully fledged legislation).

2. There has been huge talk about small business now having access to immediate write off for items purchased up to $20k in value.  I have heard so many people get excited about this today – but my question to those excited people is….Do you have a spare $20k lying around?  If not then this law is of no benefit.

3. If you do have a spare $20k lying around and wish to spend it on assets (such as computer systems, new equipment, furniture, etc) – is this the best utilisation of your $20k?  I know most small business owners I deal with and work with and speak with – would much rather have that $20k in their back pocket in the form of wages than spend it on assets they don’t really need.  All I am saying is – review the reason for spending the money before flashing the cash.

4. Most importantly – a $20k tax deduction is not the same as a $20k tax reduction.  Deduction does not equal reduction.   “Please explain” I hear you ask.  Sure thing.  Ok – lets assume a company earns $60k profit in a year.  Company tax at the existing rate of 30% would mean the company pays $18k tax.  If that same company took their $60k profit and spent $20k on computers, their new profit would be $40k. Still with me?  Tax at 30% on this new profit would now be $12k.  So they have spent $20k but only reduced their tax by $6k.

5. Individual/Sole trader operations have varying tax rates.  So lets use the example above for another calculation (yes I love numbers – but I want you to actually see the results).  So a sole trader makes $60k profit.  Based on current individual tax rates (and assuming no other income or complications or medicare or anything that will totally blow your mind), that individual will pay $11047 in tax.  Now if that sole trader spent $20k on their business assets, the profit recorded will drop to $40k.  The tax the individual will now pay, works out to be $4547.  Feel free to check my calculations using the ATO tax rates here.  So they have got a $20k tax deduction – but the overall tax has reduced by only $6500.

Now don’t get me wrong – I get why the government is choosing this a policy.  They want to stimulate spending to boost the economy.  They want to encourage us to build our business.  I TOTALLY GET THAT.

But even if this policy makes it to royal assent, I won’t be spending an extra $20k in my business unless whatever that item is will boost my business, help it grow, help my business be more efficient or it helps to build my brand.  End of story.

(no politicians were harmed in the writing of this blog post.  all information provided is general in nature. more budget information can be found here)