Investing in property is a popular strategy for building wealth and securing financial stability. However, one aspect that often goes overlooked by property investors is the effective management of tax obligations.
The Australian Taxation Office (ATO) offers a tool known as the “tax variation form” (also referred to as PAYG income tax withholding variation application), which can provide significant advantages for property investors.
In essence, the variation is a forecast view of what your tax return is projected to give you as taxable income and in turn tax refund. The tax on this new estimated taxable income is then calculated by the tax office and a new rate is calculated for you based on this to reduce the tax deducted from your wages.
This blog explores the benefits of using a tax variation form and how it can enhance your investment strategy.
For most tax deductions, the standard process involves waiting until the end of the financial year to submit your tax return and then patiently awaiting your refund. While this method is suitable for most individuals, it can create significant cash flow issues for property investors, whose pending tax breaks are often substantial enough that waiting until the end of the financial year is not feasible.
For many investors, these tax breaks are what make owning an investment property financially viable in the first place. By addressing these cash flow concerns proactively, property investors can better manage their finances and ensure the sustainability of their investments.
Understanding the Tax Variation Form
A tax variation form allows property investors to adjust the amount of tax withheld from their regular income, based on anticipated tax deductions.
This form is particularly useful for those with negatively geared properties, where the costs of owning the property exceed the rental income, leading to a tax-deductible loss.
By submitting a tax variation form, investors can reduce the amount of tax withheld from their salary or other income streams, providing immediate financial relief rather than waiting for the end-of-year tax return.
We usually recommend submitting this no later than end of May of the current financial year to be valid for the next financial year, once your property has been built.
You can find it under the title: Understanding the Tax Variation Form
A Case Study | Cash Flow on an Investment Property
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.
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.
Benefits of Using a Tax Variation Form
- Improved Cash Flow
One of the most significant benefits of using a tax variation form is the improvement in cash flow. Negative gearing can lead to substantial annual tax deductions, which typically result in a refund when lodging your annual tax return.
By applying for a tax variation, you can access these funds throughout the year instead of waiting until tax time. This improved cash flow can be used to cover mortgage repayments, property maintenance, or other investment opportunities, reducing financial strain and enhancing your overall financial stability.
- Investment Growth and Opportunities
With improved cash flow, property investors have more capital available to reinvest. This additional cash can be used to make further property investments, diversify your investment portfolio, or even take advantage of other high-return investment opportunities.
By having access to more funds during the year, you can seize market opportunities that might otherwise be out of reach, accelerating your wealth-building process.
- Reduced Financial Stress
Owning investment properties comes with various financial obligations, including mortgage repayments, property management fees, and maintenance costs. The immediate financial relief provided by a tax variation form can significantly reduce financial stress.
Knowing that you have extra funds available each pay period can provide peace of mind and allow you to manage your investment more effectively.
- Tax Planning and Efficiency
A tax variation form encourages proactive tax planning. By estimating your tax position ahead of time, you can better understand your financial situation and make informed decisions.
This proactive approach ensures you are not overpaying taxes during the year, leading to more efficient use of your money. Additionally, working with a tax professional to complete the variation form can provide insights into further tax-saving strategies and optimisations.
- Smoothing Out Income and Expenses
Property investments often come with fluctuating income and expenses. Rental income might be steady, but maintenance costs, vacancies, and unexpected repairs can cause significant variations in your financial outlays.
A tax variation form helps smooth out these fluctuations by providing a steadier flow of funds throughout the year. This predictability can make budgeting and financial planning more straightforward and effective.
- Enhanced Property Management
With the additional funds available through a tax variation, property investors can better manage and maintain their properties. Regular maintenance and prompt repairs can preserve and potentially increase the value of your investment property.
Furthermore, well-maintained properties are more attractive to tenants, reducing vacancy rates and ensuring a steady rental income.
- Facilitating Debt Reduction
For property investors, managing debt is a crucial aspect of maintaining financial health. The improved cash flow from a tax variation form can be used to make additional repayments on your mortgage or other debts.
Reducing debt faster can save significant amounts in interest payments over the long term and improve your overall financial position.
How to Apply for a Tax Variation
Applying for a tax variation involves estimating your income and deductions for the financial year. This can be done by completing the PAYG income tax withholding variation application form, available on the ATO website. You can find info HERE.
Here are the steps involved:
- Estimate Your Deductions: Calculate the deductions you expect to claim, including interest on loans, property management fees, maintenance costs, and other related expenses.
- Complete the Form: Fill out the variation form with your estimated income and deductions. It’s advisable to work with a tax professional to ensure accuracy.
- Submit the Form: Submit the completed form to the ATO. Processing times can vary, so it’s beneficial to apply well before the start of the financial year.
- Adjust Withholding: Once approved, your employer will adjust the amount of tax withheld from your income according to the variation notice provided by the ATO.
While you can apply for a PAYG withholding variation yourself, we highly recommend completing the variation with the assistance of your accountant to ensure accuracy and compliance. It can be a detailed process.
Keep in Mind…
Keep in mind you’ll need to apply for this each year and it’s valid from 1st July – 30th June.
It can take up to 28 days to process online so getting your paperwork in by the end of May is beneficial.
If you change jobs during the year, you’ll also need to put in a new application to the tax office.
Conclusion
Using a tax variation form is a strategic tool that offers multiple benefits for property investors. From improved cash flow and reduced financial stress to enhanced investment opportunities and better property management, the advantages are substantial.
By incorporating this approach into your investment strategy, you can maximise the potential of your property investments and achieve greater financial stability.
Proactive tax planning and efficient use of available resources can make a significant difference in your investment journey, making the tax variation form an essential consideration for all property investors.
For further information visit ATO PAYG Witholding Variation or contact your accountant, who can assist.
If you’re interested in exploring additional methods to enhance your tax savings, we recommend checking out these blog posts:
