Avoiding the hype of EOFY marketing with your tax accountant

Heading into the end of the financial year (EOFY) can feel like navigating a maze of sales pitches and tax temptations, especially when we are bombarded with slogans like “EOFY sale”, “Boost your tax return” and “Tax time deals”. This can be an excellent opportunity to purchase items you need or have been planning to buy at discounted prices but it’s important not to get swept up in the June marketing wave because there are no tax reasons for unnecessary or impulsive purchases if you or your business doesn’t need it.

If you’re an employee, self-employed, a small business owner, a contractor, a consultant, or a freelancer, staying level-headed amidst all the EOFY hype is important to ensuring any EOFY purchases benefit you in the next financial year. JSA Accounting has put together some tips to help you steer through the EOFY marketing maze.

How to avoid misguided spending

Keep the Big Picture in mind

Tax deductions exist to offset legitimate business expenses. This ensures that individuals and businesses aren't burdened with unnecessary taxes on items and expenses that are essential for conducting business and generating income. It's perfectly fine to make necessary purchases at discounted rates and claim deductions accordingly. By making sound financial decisions amidst the EOFY rush, you can help support your financial health and maximize your tax benefits.

Be mindful of the messaging

Don’t fall for advertising that promises dollar-for-dollar tax refunds. Many EOFY retail marketing campaigns suggest that spending $100 will yield a $100 refund, but this oversimplifies the tax refund process. In reality, purchasing a $100 deductible item before June 30 won't directly translate to receiving $100 back from the Australian Taxation Office (ATO). Instead, the $100 spent on deductible items reduces your taxable income, lowering the amount of tax you owe. While this will result in paying less tax, it doesn't give you a dollar-for-dollar refund.

The amount you can reclaim will vary depending on your tax bracket. As a sole trader, the tax rate is paid at the individual income rate for that financial year. The flat company tax rate is set at 30% for most companies. For clarification on where your company sits and the tax requirements, it is best to consult with a qualified tax accountant.

For small businesses who have already received advice from their tax accountant, strategic spending before EOFY can help reduce a percentage of your taxable earnings. Similarly, employees investing in work-related tools or equipment may get similar advice on how strategic spending can affect their tax refund. However, as we’ve stated previously, the reclaim amount won't match the exact amount spent.

As a guideline for employees, capital items like tools and equipment that cost $300 or less can typically be claimed in full as an immediate deduction. However, for items exceeding the $300 threshold, the deduction must be spread out over the item's lifespan through depreciation. The ATO typically determines the lifespan of assets, which can be depreciated over a period of 2-4 years, depending on the type of asset.

Small business taxpayers may be eligible for concessions that enable them to claim a full deduction for asset purchases used in their business, as long as the cost of each acquired asset remains under $20,000.

Calculate wisely

Although legitimate EOFY spending can be helpful, small business owners and individuals should crunch the numbers with their tax accountants to ensure they’re gaining an actual benefit.

Retailers promising you returns on your tax for their sales items don’t know whether the laptop, sofa or software on offer is legitimately suitable for your situation as a tax deduction. They’re just promoting their products. So, while a discount may seem appealing, it might not improve your financial bottom line.

Avoid dubious claims

Make sure you are honest when claiming expenses for work purposes. Claim only what's genuinely work-related, and accurately allocate shared business and personal expenses, such as vehicles or technology. The ATO has extensive data analysis capabilities, enabling it to identify potentially fraudulent claims. While you might assume that categorising your weekend attire as work uniform is harmless, the ATO views such claims differently.

Overstating expenses is taken seriously by the ATO, and if discrepancies are uncovered, you could face repayment demands, penalties, and interest charges. Collaborating with your tax accountant to accurately define claim usage to avoid over or under-claiming is advised, especially for significant purchases like cars or computers.

Exercise caution with prepayments near EOFY

There are two methods of treating incoming and outgoing moneys with business accounting; cash accounting and accrual accounting. Most larger businesses use accrual accounting, whereas small and medium businesses use both.

The difference between cash and accrual accounting lies in the timing of when sales and purchases are recorded in your accounts. Cash accounting recognizes revenue and expenses only when money changes hands, but accrual accounting recognizes revenue when it is earned, and expenses when they are billed (but not paid).

Issuing invoices and/or accepting prepayments from clients in both systems can have earnings implications, and therefore EOFY tax obligations, that can be quite complex. Your business structure and financial situation are likely to play an important role in determining whether EOFY invoicing and prepayments will aid your business or not. It is important to seek advice from your tax accountant before committing to any financial arrangements as due consideration should be given to the effects on the current financial year, as well as future years.

Seek professional guidance from a tax accountant

EOFY isn't a one-size-fits-all scenario and consulting with a JSA tax accountant will provide you with tailored advice based on your specific circumstances. Our expertise can help you navigate complex tax laws and optimize your financial position.

EOFY spending and preparation should prioritise smart financial decisions over impulse purchases. While it's helpful to capitalise on legitimate tax deductions, it's equally important not to fall for marketing ploys. By staying informed, calculating wisely, and seeking expert advice when needed, you can navigate EOFY with confidence.