We find that tax deductions are often the least understood area of finance. People often spend money simply because it’s a tax write-off. But what they don’t consider is whether that expense will help them in some way in the future.
This week, we have a listener question from Linda. Linda and her husband live on the Sunshine Coast and are 5 years away from retirement. They have $200,000 in cash and her question is whether they should invest the money into superannuation, or use it to build a 2-bedroom cottage on their existing acreage, allowing for dual occupancy. The detached cottage would provide an income stream for Linda and her husband over the next 5 years and continue into their retirement. Linda and her husband might move into the cottage later on in life and rent out the main property instead, for about $600 a week.
Are price and value the same?
Actually, price and value are very different. Take ‘the hamburger test’ as an example – the price of a hamburger has gone up significantly in the last 30 years, but the value has not. What that means is, if you buy a hamburger now as opposed to 30 years ago, you’re still just getting a hamburger, but now you’re paying a lot more for it due to inflation. The price is different, but the value is the same.
There’s no such thing as a free lunch. An oldie but a goodie – especially when it comes to tax deductions. Often you hear people justify buying a product or service because it’s a ‘tax write-off’ – and while that may be true, it still comes at an expense. So while the purchase might reduce your taxable income, the funds to purchase still have to come from somewhere. And that somewhere is your (or your company’s) pocket.
First of all, thank you to Mike for listening to our podcast, and for sending us your question. We really enjoyed preparing for this complex podcast and we dug deep to analyse the facts and figures associated with it.
Dallas Davison, Michael Hogue and Ali Hogue.