It’s almost the start of a New Year, and for many property investors, the tax deductions they can claim is the last thing on their minds.
However, setting goals and making the necessary enquiries now is a great way to set you up for the year ahead.
One resolution property investors can achieve easily is to ensure they are receiving the maximum depreciation deductions they can claim.
Owners of any income producing property are entitled to claim depreciation for the wear and tear of the building and the plant and equipment items it contains. To take advantage of the available deductions, investors should speak with a specialist quantity surveyor to arrange a tax depreciation schedule. This should be organised immediately after settlement. The schedule will outline all of the deductions the investor can claim each year for 40 years.
Often, investors leave obtaining a schedule until the end of financial year because they don’t realise they could be benefiting from the deductions the schedule outlines sooner.
There is a system in place, called Pay As You Go (PAYG) which allows investors to take advantage of the deductions available to them regularly.
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.
There are three simple steps involved in setting up a PAYG withholding variation:
- Contact an accountant to make sure that a PAYG withholding variation is suitable for your individual circumstances. An accountant will usually organise a PAYG withholding variation by submitting estimated financial information to the Australian Taxation Office
- To support a PAYG withholding variation, ask a specialist quantity surveyor to produce a tax depreciation schedule. This schedule will outline all current and future depreciation deductions for an investment property. The higher the depreciation deductions are, the less tax an individual needs to have taken out of their pay
- Once the request has been approved by the ATO, the employer will reduce the amount of tax withheld, increasing the owner’s take-home pay.
Below is an example which demonstrates how depreciation will assist an investor in a scenario where they nominate to use a PAYG withholding variation.
The investor owns a house purchased for $532,000. The property is rented for $600 per week, or $31,200 per year. Expenses for the property include interest, rates, repairs and maintenance, property management fees and insurance, totalling $41,400.
An assessment of the property by a specialist quantity surveyor discovered the investor could claim $13,354 in depreciation in the first full financial year.
Before claiming depreciation, the investor will receive an additional $145 per fortnight in their pay by applying the PAYG withholding variation.
By including the depreciation claim, the investor will receive $335, or an additional $190 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.
It is important to note 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.