Property investors usually wait for the end of financial year (EOFY) to earn money. However, relying solely on the EOFY may lead to cash flow issues. To avoid these problems, investors should know the benefits of a Pay As You Go (PAYG) withholding variation.
What is a withholding variation? Under tax law, the Australian Taxation Office (ATO) may vary the amount a payer is required to withhold from a withholding payment to meet the special circumstances of a particular case or class of cases.
The purpose of varying the rate or amount of withholding is to make sure that the amounts withheld during the income year best meet the payer’s end-of-year tax liability. You can request an increase or decrease in the rate or amount of withholding. If you believe your circumstances warrant a variation of the rate or amount of withholding, you will need to determine whether the variation is upwards or downwards.
Tax deductions are often applied at the EOFY after you have submitted your return. A PAYG withholding variation lets property investors receive a deduction every time they are paid. They get their deduction throughout the year but have to apply every year and if they change jobs.
The pending tax breaks of property investors are substantial that they sometimes can’t afford to wait until the EOFY. Many investors afford properties because of these tax breaks.
Based on a case study, a $400,000 investment property will need $12,000 per year or $230 per week of pre-tax cash flow to support the property. This includes rental income, interest expense and other general expenses. Through a PAYG withholding variation, the investor would just need $4,440 per year or $85 per week to support the property, assuming all the expenses are deductible and total income is more than $100,000 with a 37 per cent marginal tax rate, excluding Medicare and other levies.
The case study clearly shows that investors may benefit from an improved cash flow through a PAYG withholding variation. Once approved, the ATO will let you know your new tax rate and your
take-home pay will effectively increase.
It is recommended that you talk to an Accountant to prevent errors when applying for a PAYG withholding variation. This strategy helps many Australians to build up their property portfolios. For more information about taxes in Australia, contact a specialist to discuss your particular circumstances.
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