Should I buy something to save tax? Around tax season, a common question that we are asked by individuals who have businesses is if they should invest in something to save tax. One of the biggest pieces of advice we can give around this topic is to only purchase something if you genuinely need it for business purposes.
When you purchase a capital item, there is a cap of $20,000 that can be claimed. This means that if you purchase an item, say a car for instance, that costs your company $25,000, the most you can claim on your taxes in one year is $20,000 of that purchase without having to claim this item over multiple years. Once you have claimed this, the most tax that you will receive back is 47% of that purchase. That assumes you are a sole trader on the maximum marginal rate. To put it in simple terms, for every $1.00 you spend, the most you can get back is $0.47. It is important to note that this is best case scenario and not everyone will get the full 47% back. Most individuals and entities are not on the 47% rate but around 34.5%-39%. It is for this reason that it is of value to purchase an item only if it is something that is needed.
We do often recommend businesses to consider purchasing items if it is something that they were looking to buy within the next few months. For example, if your business is looking to buy a machine in August, it might be recommended that you push up the purchase date in order to claim the purchase on the current years Tax Returns.
When we get into discussions with our clients about purchasing items, they sometimes question if they should put their investments back into their stock. Unfortunately, this is not something that would benefit your company. At the end of the year, you are required to do a stock count. Once the stock is counted the purchased stock is added into your income and therefore cannot be written off on your tax return.
Overall, the best answer to the question is to not buy something simply for tax purposes. If your company is looking at purchasing an item to better the business or because it is an item that the company needs to invest in, then it may be of benefit to look at the timing of when your purchase this item. However, timing a purchase with a financial year is far different than purchasing an item solely for the purpose of saving on tax.