Find out why real estate investors should apply for PAYG withholding variation
The issue with tax deductions
Think
about most tax deductions. We wait for the financial year to end, submit our
tax return, and wait patiently for our refund.
While
this is fine for most people, it can create serious cash flow problems for
property investors – as their pending tax breaks are so big they can’t afford
to wait until the end of the financial year.
For
many investors, tax breaks make it affordable to own an investment property in
the first place.
To
highlight the importance of PAYG withholding variation, let’s look at an
example.
Cash flow on an investment property – a
case study
Here’s
a breakdown of sums for a typical $400,000 investment property over one year:
- Rental income -
$19,000
- Interest expense
- $27,000
- Other general
expenses - $4,000
- Pre-tax cash
flow (negative) - $12,000.
According
to these figures, you’ll need $12,000 per year (or $230 each week) to support
the property while you wait for your tax return. If you had two or more
investment properties, you’d need to find $24,000 to $30,000.
Cash flow – with tax breaks
Now
let’s look at the sums on the same property, including tax breaks.
- Rental income -
$19,000
- Interest expense
- $27,000
- Other general
expenses - $4,000
- Tax break
(deductions) - $9,000
- After-tax cash
flow (negative) - $3,000.
Clearly,
$3,000 per year (or $57 each week) is easier to manage – these tax breaks make
investing in property much more affordable.
PAYG withholding variation
This
is where PAYG withholding variation comes into play, allowing you to receive
your tax breaks each time you’re paid.
Once
approved, the tax department tells your employer your new tax rate – and your
take-home pay effectively increases.
Keep
in mind you’ll need to apply for this each year. If you change jobs during the
year, you’ll also need to put in a new application to the tax office.
Talk to your accountant
While
you can apply for a PAYG withholding variation yourself, your best option is to
use an accountant. If your accountant doesn’t know what tax variation is (it
happens), then think about making a switch.
Using
this strategy can improve your cash flow. In fact, it’s one of main reasons many
Australians are able to build up a property portfolio.
Are
you looking for your next investment loan? Contact us @ propertyloans@realrenta.com and we will arrange for a lending specialist from our trusted finance partner
to contact you shortly.
Originally published: https://www.nab.com.au/personal/life-moments/home-property/invest-property/payg
Marlene Liontis
Sunday, 24 November 2019