One of the big mistakes that we see with Property Investors is people not utilising the full range of investment property tax benefits.
The Taxation Variation Authority is a massively under utilised strategy. Sometimes the expenses associated with holding a rental property (e.g.Interest, repairs, insurances, rates,depreciation etc) are greater than the rental income received from the property. This scenario generates a tax loss and is called negative gearing.
When you incur a negative gearing loss you are entitled to apply to have your PAYG instalments reduced, so the amount of tax collected from your pay-packet is reduced. Effectively this means that your out-of-pocket costs of holding the property are reduced. It is a bit like having another tenant paying you each pay day.
The big mistake many investors make is that they do not collect this payment until the end of the year when they come to do their tax. The tax refund cheque they get back is nice but for 12 months of the year they have been denying themselves of this money. It is a bit like allowing your tenant to pay the rent on the property in one payment at the end of the year. You just would not do it, so why allow the tax man to get away with it.
The other opportunity that people in this situation miss, is one when if they were receiving that tax refund on a regular basis, they may be in a position to purchase another property investment. Allowing them to grow their wealth at a faster rate.
So how do you take advantage of these rules.
- firstly calculating your projected annual assessable income from all sources, wages, interest, dividends, rental property rent etc, and
- calculating your projected annual allowable deductions for work related expenses, interest and dividend expenses, rental property expenses including borrowing costs and depreciation claims and any other allowable deduction, and
- reporting the above to the Australian Taxation Office.
It is very important that the calculation of the projected taxable income reduction be accurate, otherwise the Australian Taxation Office will penalise the taxpayer for lodging an incorrect variation. Similarly, it is very important that the Australian Taxation Office be advised of any change of taxpayer income or expenses which may have occurred after lodging the Application for Variation of PAYG Withholding so that penalties do not apply. It is for these reasons that we recommend you speak with your accountant to assist in the preparation of the Application for Variation of PAYG Withholding and to take a conservative approach to the calculations.
This process is required to be done each year and can be a little slow as the ATO will often take up to 28 days to process your application. The first time that you complete the form arrange to have it completed as early in the year as possible. In the following years it is prudent to start the process around late May so that the variation can be effective from the start of the financial year.
The ATO will advise your employer how much tax to take out of your salary and therefore creating the benefit. If you change employers you will be required to apply again, so keep this in mind.
So the Taxation Variation Authority can be used to ease your cash flow burdens during the financial year, very important for property investors. The tax variation varies the amount of tax withheld from your wages by way of estimating your total end of financial year tax position in advance. Therefore, rather than getting a lump sum refund at the end of the year you receive it evenly throughout the financial year.
This is just one of the Investment Property tax benefits that wise property investors take advantage of and part of the Success In Property strategy for our clients.
If you are ready to discuss getting started in Property Investment or simply just wanting to review your property investment portfolio then call us on 0409228554.
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