It is a normal part of my working life to be asked how to reduce tax. There are many different ways of doing this legitimately but the one recurrent theme that non professionals return to is the theme of spending some money so that a deduction can be claimed.

I wish I had a dollar for every time I have been asked the question “If I go out and buy a new utility will that save me some tax?”

If it is used for business purposes the answer is obviously “yes”.

However it really is the height of idiocy to go and spend some money just for the sake of getting a tax deduction. If you really need a new utility for your business and it makes good business sense to replace the old one then the fact that you get a bigger tax deduction for the new one than you got for the old one is simply icing on the cake.

If you spend a dollar and this gets a 31.5cent discount from the Tax office it has still cost 68.5 cents for every dollar that you have handed over. Even if your marginal tax rate is the maximum of 46.5% spending a dollar will still leave you 53.5 cents out of pocket.

Of course it is a factor that should be considered in looking at the cash flow consequences of any commercial decision but if the tax saving is the only factor being considered when a major expense is contemplated then a wrong business decision will probably be made.

Tax breaks should never drive any business or investment decisions.