Should you bring forward tax deductions?

Well, the end of the financial year is almost here and that brings along with it all the reasons to spend money now, because you know....end of financial year...Duh!

I actually had a meeting yesterday about paying for advertising (which I have no intention of doing) and they were telling me paying the expense now would be a great time because I would "get it back on tax". But hang on - if an expense is good at the end of the financial year because of tax planning, why on earth would they want additional income right at the end of the year. Aren't they going to feel like suckers paying tax on that extra profit....?

So, I would hope we all know, that incurring an unnecessary expense is just silly. But there is some benefit to pushing income/expenses around. On the advertisers point of view, they would much prefer to get the sale and have the extra profit at the end of the financial year rather than not have the sale at all.

Paying for something on 30 June rather than 1 July, gives you the tax benefit 1 year sooner and you've only incurred the cost 1 day sooner - so a no brainer really. But how far forward should we pay a genuine expense so that it's worthwhile?

The answer is quite simple. As a general rule it's the proportion of the year of your tax rate. So, if you are on the 34.5% marginal tax rate, then any genuine expenses that you would pay within the first 126 days of the financial year it's worthwhile bringing forward and paying on 30 June. If you are on a lower marginal tax rate, then a bit less, a high tax rate, a bit more. Realistically though, you won't pay right on 30 June, it'll be a few days before, and when you get around that period of 126 days it's very line ball - so lets just say up to a maximum of 4 months or any expense that would come up before end of October.

The big thing though is - Do you expect to be on a different tax rate next financial year? If your income is going up and you're likely going to be on a higher tax rate next FY, then leave as many expenses as you can for next FY where you will get a bigger tax benefit, alternatively, visa versa if your income is going down.

What about a monthly cost that you can prepay for a full financial year? Like interest on a loan, or monthly insurance premiums that are deductible to you. Well, the answer is don't do it unless you get a discount (which you often can) but if there is no discount on offer for paying annually in advance, then it isn't worth it (well, the numbers state that if you pay the monthly cost at the start of every month so the first month would be 1 July and so forth, and you are on the top marginal tax rate, then there is a small benefit but as a general rule, don't prepay a monthly cost unless you're getting a discount).