Property investors evaluating their current financial position and considering what options they can take to improve the cash flow gained from their investment should consider a Pay as You Go (PAYG) withholding variation.
What is PAYG?
The PAYG method of tax collection was introduced in July 2000. This method replaced previous versions of the same system, such as Pay as You Earn (PAYE). The PAYG system allows investors to take advantage of deductions regularly, rather than in one lump sum at the end of the financial year.
The PAYG variation estimates your expected tax refund for the financial year and allows your employer to take less tax out of your wages. An accountant will usually organise the PAYG variation by submitting estimated financial information to the Australian Taxation Office (ATO). This can be done at any time during the year. For property investors, the tax liability is reduced based upon the anticipated deductions like interest, maintenance, rates, and depreciation on a rental property.
Once a request has been made, the property owner’s employer will reduce the amount of tax withheld, therefore increasing their take home pay in each pay packet.
It is important to note that submitting the PAYG 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.
Property depreciation adds value to PAYG withholding variation
Maximising property depreciation and capital works deductions will increase the cash return for property investors. Property depreciation will strengthen the PAYG withholding variation by reducing the investor’s taxable income.
As depreciation is a non-cash deduction, nothing needs to be spent to claim it. The ATO allows investment property owners to claim property depreciation due to the wear and tear and decline in value of a building and the plant and equipment assets contained* over time.
To support your PAYG application, a specialised quantity surveyor can produce a property depreciation schedule for property investors. The property depreciation schedule will outline all current and future depreciation deductions for an investment property. Under the PAYG system, the higher depreciation deductions are, the less tax an individual needs to have taken from their regular pay packet.
By obtaining a depreciation schedule straight after purchasing an investment property, the new owner can maximise returns immediately through the PAYG withholding variation.
A PAYG withholding variation provides added flexibility for property investors. Having access to the extra money during the year will make it easier to manage cash flow especially when there can be surprise costs. This also provides an opportunity for the property owner to invest the extra money or reduce loan liabilities.
*Under proposed changes outlined in draft legislation (section 2 of Treasury Laws Amendment Bill 2017), investors who exchange contracts on a second hand residential property after 7:30pm on 9 May, 2017 will no longer be able to claim depreciation on plant and equipment assets. Investors who purchased prior to this date and those who purchase a brand new property will still be able to claim depreciation as they were previously. BMT Tax Depreciation will be making an official submission outlining our concerns along with suggestions of alternative methods to better resolve the government’s integrity issue.