Why wait all year when deductions can be claimed as you go?
Investors often look forward to tax time.
Many of the losses from holding a property can be claimed back, including interest, rates, repairs and maintenance, property management fees and depreciation deductions.
Many investors may not realise that they don’t have to wait all year to benefit from the deductions available to them.
Instead, they can improve their cash flow throughout the year simply by nominating to use a Pay As You Go (PAYG) withholding variation.
Introduced in July 2000, a PAYG withholding variation allows individuals to vary the amount of tax withheld by their employer in each pay to anticipate their tax liabilities.
This means that they can take advantage of the deductions available to them regularly, rather than waiting until the end of a financial year for their tax refund.
By selecting a PAYG withholding variation, a property investor’s expected tax refund for the financial year is estimated. This allows their employer to take less tax out of their wages.
The following example shows how a PAYG claim is calculated for an investor without depreciation and how including the depreciation claim will help to further improve the investor’s fortnightly income.
The investor owns a house purchased for $532,000 and rented for $600 per week, or $31,200 per year. Expenses for their property including interest, rates, repairs and maintenance, property management fees and insurance totalled $41,400.
An assessment of the property by BMT Tax Depreciation discovered the investor could claim $13,354 in depreciation for the property in the first full financial year.
Before claiming depreciation, the investor will receive an additional $145 per fortnight in their pay by applying the PAYG withholding variation.
By including the depreciation claim, the investor will receive $335, or an additional $190 in their fortnightly pay.
As can be seen in the example, a PAYG withholding variation will provide added flexibility for a property investor.
Having access to the extra money during the year makes it easier to manage cash flow, especially when there can be surprise costs such as urgent repairs or maintenance.
The additional income also gives the owner the option to invest the extra money or reduce loan liabilities.
It is important to note that submitting a PAYG withholding variation does not replace a normal tax return.
A tax return still needs to be filed at the end of the year to calculate the actual amount of tax liability.
Three simple steps to set up a PAYG withholding variation
- Contact an Accountant to make sure that a PAYG withholding variation is suitable for an individual’s circumstances. An Accountant will usually organise a PAYG withholding variation by submitting estimated financial information to the Australian Taxation Office (ATO).
- To support a PAYG withholding variation, ask a specialist Quantity Surveyor to produce a tax depreciation schedule. This schedule will outline all current and future depreciation deductions for an investment property. The higher the depreciation deductions are, the less tax an individual needs to have taken out of their pay.
- Once the request has been approved by the ATO, the employer will reduce the amount of tax withheld, increasing the owner’s take-home pay.