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Make a further $215 each fortnight with one step

Investors don’t need to wait an entire year to claim thousands in deductions from their rental properties. They can instead routinely increase their cash flows throughout the financial year with one simple step.

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A Pay as You Go (PAYG) withholding variation, previously known as a Section 221YD, allows a person to change the amount of tax withheld by their employer.

A downward PAYG withholding variation reduces the amount of PAYG tax withheld as it accounts 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 regularly, rather than waiting every 12-months for their tax return.

On the other hand, an upward PAYG variation increases the amount of tax paid each pay cycle. This could be an option for property investors who own a positively geared investment property and want to avoid a big tax bill come lodgement time.

The most common PAYG withholding variation is a downward variation. To demonstrate how this works, here is an example.

Sasha earns an annual salary of $65,000 from her employer, paid fortnightly. She owns a rental property and estimates that her property’s overall annual loss will be $17,000 (rental income minus expenses). Depreciation makes up $10,000 of that total.

When applying a PAYG downward variation, her estimated taxable income will be $48,000 ($65,000 - $17,000). Sasha can apply for a PAYG variation to have her tax withholding rate based on the estimated $48,000. If the application is approved she will pay $215 less in tax per fortnight.

Depreciation is one of the biggest tax deductions available to property investors. They can claim it on the natural wear and tear of their investment property and eligible assets it holds.

This non-cash deduction can make a significant difference to an investor’s after-tax cash flow.

The below case study demonstrates just how big a difference depreciation can make in a PAYG withholding context.

Clarke purchased an investment property and his first full year depreciation claim came to $15,538. The following table demonstrates the fortnightly difference his depreciation deduction would make to his fortnightly after-tax cash flow with a PAYG withholding arrangement in place.

New 3-bedroom house purchased for $780,000
Annual rental income
($680 x 52)
$35,360 Annual rental income
($680 x 52)
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
Fortnightly difference of $221

*Based on a tax rate of 37 per cent

Where depreciation isn’t claimed, Clarke receives an additional $137 per fortnight in his pay by applying the PAYG withholding variation. But with a depreciation claim of $15,538, he receives $358, or an additional $221 in his fortnightly pay.

To create a PAYG withholding variation, an application must be made. This application needs to be approved by the ATO before any variation can be applied. A BMT Tax Depreciation Schedule can assist in this process as it will outline the depreciation deductions available from the property for up to forty years.