Why spending more to save on tax is a bad idea

We hear this a lot from business owners in New Zealand:
“I might just buy something before year-end to reduce my tax bill.”

But here’s the thing - spending $1 to save ~33c in tax still costs you 67c in cash.

Tax savings are great if you need to spend the money anyway, but spending for the sake of a deduction? That’s rarely a smart move.

Let’s Break It Down: A Worked Example

Please note - tax rates obviously aren’t flat rate 33%, but for the sake of this example, we have assumed they are to keep it simple.

Scenario:

• You’re a sole trader or company paying tax at 33%.

• You’ve got $100,000 profit at year end.

• You’re tempted to spend $5,000 on something you don’t really need, just to reduce your tax bill.

Option A: Don’t Spend

• Profit: $100,000

• Tax at 33%: $33,300

• Net cash in your pocket after tax: $67,000

Option B: Spend $5,000 on a deductible item

• New profit: $95,000

• Tax at 33%: $31,350

• Cash remaining after tax: $95,000 - $31,350 = $63,650

The Real Cost of the Deduction

Even though you saved $1,950 in tax, you spent $5,000 to get that. So overall you’re $3,350 worse off in cash terms than if you had kept the $5k and paid the full tax bill.

So yes, you save tax — but if you’re only spending more to get the deduction, it may not stack up. It’s important to run the numbers carefully.

When Spending Does Make Sense

• You were going to spend the money anyway and this was a planned purchase.

• You’ve had a great year and want to bring forward deductible costs already budgeted for next year.

But Be Cautious If...

• You’re buying things just to avoid tax.

• You haven’t considered cash flow - that $5k might be better saved for GST, PAYE, or tax next year.

• You’re thinking of it like a “sale” - it’s not 67% off, it’s still 67% on you.

If you need help deciding whether making a big purchase makes sense, reach out to our team for help.