The Truth About Tax Deductions: How Much Do You Really Save???
- Future Accounting
- Jun 10
- 3 min read
Updated: Aug 13
Why a $1,000 Tax Deduction Doesn’t Mean a $1,000 Refund
It’s a common mix-up: someone spends money on something “tax deductible” and assumes the full amount will be knocked off their tax bill.
With all the buzz around 30 June sales and tax tips, it’s easy to assume that spending $1,000 on a tax-deductible expense will cut your tax bill by the full $1,000.
Sounds great! BUT unfortunately, that’s not exactly how it works.
Tax reductions you receive as a result of a deduction are solely related to your average tax rate. It is the percentage of each additional dollar on average paid in tax, and it shifts as a function of your general level of earnings.
For example, if your rate is 30% and you pay $1,000 in a tax deductible category, then your taxable income decreases by $1,000. You would then owe 30% of this amount in tax, so $300.
The key thing to keep in mind is that you are still on the hook financially for the other $700. The deduction assists, but does not fully offset the cost.
Looking at a practical example:
On June 29th, Mr. Farmer purchases $10,000 worth of fencing materials for property repairs and maintenance. With his average tax rate at 26% for the 2025 financial year, making this purchase before year-end reduces his taxable income by $10,000. That move saves him $2,600 in tax.
End result? Even with the deduction, those fencing materials ultimately cost him $7,400 out of pocket.
If you’re on a higher income, your average tax rate may be higher - and that means your deductions will give you a bigger tax saving. That’s why high-income earners often see more benefit from the same deductions compared to someone on a lower income. But the golden rule still applies: you’re still spending real money to get that deduction.
In case you were not sure the following table outlines the current tax rates in Austraila
Don’t Spend Just to Save on Tax: Spend Because You Need To
It can be tempting to rush out and buy something before June 30 just to reduce your tax bill. But if you don’t genuinely need it, you're still out of pocket - even with the tax saving.
So here’s our best advice: Only buy things that your business or work truly needs.
Then, think of the tax deduction as a bonus that sweetens the deal - not the reason for the purchase.
If you're ever unsure about how a deduction will affect your tax position, it’s always a smart move to check first.
Got questions? Our friendly team is here to help crunch the numbers and give you peace of mind. Get in touch - we’re just a call or click away!
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
