It’s About the Investment-Not the Tax

"David Balwin

David Balwin
CPA | Accountant | Business Advisor

I am forever hearing small business complaining about the tax they pay and asking how to reduce their liability.  I find this very interesting as if these business owners spent as much time focusing on increasing revenue then the tax issue would not be such a focus.

I agree  …  No one likes to pay tax … but at the end of the day Government needs taxes to fund services to the community like police, education, health, roads etc.

The point a lot of small business owners forget is that the main focus of any business decision should be based on the return that the investment is going to provide.  If the investment does not stack up then any potential tax advantages are not worth considering.

I suggest that the first criteria when considering making an investment is – does the opportunity provide a suitable return for the risk you are taking e.g. if you were to invest $100,000 purchasing a business what return would you want to make on your investment.  A simple starting point in considering the return on investment is to look at what would one of the big four banks offer you to invest the money with them – (somewhere between 3% and 5% depending on the period the money was invested for etc).

So, if the bank was offering say 4% with minimal risk, then what is the risk/return you should be seeking from a business that does not have a credit rating, may have little management skills and lack policies.  Maybe a 20 to 30 percent return would not be unreasonable, for if you were not to achieve this type of return would you simply invest your hard earned money in one of the banks or government bonds where risk is low.

Same applies if you are looking to invest in, for example, property.  For example, if you were considering purchasing a commercial unit in Strathpine on Brisbane’s north for say $250,000 you would need to consider the return on investment, tenancy trends, out-goings etc and see how it all stacks up well before considering tax benefits.

Having said this, once you have determined whether the investment is sound from an economic return perspective, then look at how tax can be minimised within the boundaries of the legislation.

The bottom line to any business decision should therefore always focus on expected returns for risk first and only then look at the tax consequences before making a final decision.