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 often quite substantial, they can’t always afford to wait until the end of the financial year.
For many property investors, tax breaks can make it affordable to own an investment property in the first place. Choosing to use a Pay As You Go (PAYG) withholding variation could allow a property investor to routinely improve their cash flow by reducing the amount of tax withheld by their employer.
According to industry experts such as BMT Depreciation and MCG Quantity Surveyors using a PAYG withholding variation improves cash flow for property investors.
What is a PAYG withholding variation and how does it work?
A PAYG withholding variation, previously known as a Section 221D certificate, enables investors to take advantage of tax deductions regularly by allowing a person to change the amount of tax withheld by their employer.
A PAYG withholding variation reduces the amount of PAYG tax withheld as it allows for additional tax deductions, like tax-deductible expenses and depreciation available from an investment property.
A property investor may do this to get more cash in their pocket on a regular basis, rather than waiting every 12-months for their tax return.
How to set up a PAYG withholding variation?
Step 1: Contact your accountant. An accountant will usually organise a PAYG Withholding variation by submitting estimated financial information to the Australian Taxation Office (ATO).
Step 2: Contact a specialist quantity surveyor to order 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 needs to be taken out from your salary.
Step 3: Once a request has been approved by the ATO, your employer will adjust the amount of tax withheld.
Step 4: A PAYG withholding variation doesn’t replace your normal tax return. You will still need to visit an accountant at the end of the year to calculate the actual amount of tax.
Cash flow on an investment property – a case study
John purchases a brand-new house for $780,000 which is rented out for $680 per week, or $35,360 per annum. John has expenses including interest, rates, repairs and maintenance, property management fees and insurance totalling $45,000 per annum.
Investment Property Purchase | $780,000 | |||
Annual rental income
($680 x 52 weeks) |
$35, 360 | Annual rental income
($680 x 52 weeks) |
$35, 360 |
Annual Expenses | $45,000 | Annual Expenses | $45,000 |
Depreciation Deduction | $0 | Depreciation Deduction | $15, 538 |
Total Taxation Loss | $9,640 | Total Taxation Loss | $25,178 |
Tax Refund* | $3,566 | Tax Refund* | $9,316 |
Fortnightly PAYG
Cash difference |
$137 | Fortnightly PAYG
Cash difference |
$358 |
Fortnightly difference of $221 |
- Based on a tax rate of 37 per cent.
How PAYG variation works
If John doesn’t claim depreciation, he receives an additional $137 per fortnight by applying his PAYG withholding variation. But with a depreciation claim of $15,538, John receives $358, an additional $221 in his fortnightly pay. As we can see, a PAYG withholding variation provides John the ability to improve cash flow on a regular basis rather than a lump sum once a year.
PAYG withholding variation provides investors access to additional cash flow during the year, especially in the event of surprise costs such as urgent repairs and maintenance or interest rate increases. This additional income also provides the owner the option to invest the extra money, reduce debt liabilities or top up off-set accounts.
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Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
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