Every Property Professional knows their investor clients look forward to tax time each year.It's the chance for investors to claim back many of the losses from holding a property throughout the year
such as interest, rates, repairs and maintenance, property management fees and depreciation deductions.
What many investors don't realise is 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 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 investors can take advantage of the deductions available to them regularly, rather than waiting until the end of the 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 a depreciation claim will help to improve the investor's fortnightly income.
An investor owns a two bedroom inner city apartment purchased for $680,000 and receiving an annual rental income of $34,000. Expenses for their property, including interest, rates, repairs and maintenance, property management fees and insurance totalled to $49,000.
An assessment of the property by BMT Tax Depreciation discovered the investor could claim $16,500 in depreciation deductions for the property in the first financial year.
Before claiming depreciation, the investor will receive an additional $213 per fortnight in their pay by applying the PAYG withholding variation.
By including the depreciation claim, the investor would receive $448, or an additional $235 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.
Investors need to be aware 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.
Property Professionals should ensure their clients contact an Accountant if they are considering a PAYG Variation and also recommend they speak to a specialist Quantity Surveyor to find out what depreciation deductions will apply for their investment property.