Property investors often rely on tax breaks to make money on their investment. But hanging on until the end of the financial year – and until you file your return – can cause serious cash flow problems. The Successful Investor’s Michael Sloan explains the advantages of PAYG withholding variation.

With most tax deductions we wait for the financial year to end, then submit our tax return and wait patiently for our refund.

While that’s fine for many people, it can create serious cash flow problems for property investors. Why? Because their pending tax breaks are so substantial they can’t afford to wait until the end of the financial year. For most investors it’s the tax breaks that make it affordable to own an investment property in the first place.

Cash flow on an investment property — a case study

For example, let’s look at the sums for a typical $400,000 investment property over one year.

Rental income - $19,000
Interest expense - $27,000
Other general expenses - $4,000
Pre-tax cash flow (negative) - $12,000

So you need $12,000 per year—or $230 each week—to support this property while you wait for your tax return. If you had two or more investment properties, you’d need to find $24,000 to $30,000.

Cash flow — with tax breaks

Now let’s look at the figures on the same property, including tax breaks.

Rental income - $19,000
Interest expense - $27,000
Other general expenses - $4,000
Tax break (deductions) - $7,560*
After-tax cash flow (negative) - $4,440

Now, $4,440 per year—or $85 each week—is obviously easier to find than $230 a week. It's clear these tax breaks make investing in property much more affordable.

*Assuming all the expenses are deductible as spent and total income is above $100,000, with the marginal tax rate of 37% (excluding Medicare and other levies).

PAYG Withholding Variation

You can realise this improved cash flow by applying for a PAYG withholding variation. This lets you receive your tax breaks each time you’re paid. Once approved, the Australian Tax Office (ATO) tells your employer your new tax rate and your take-home pay effectively increases.

A tip: you’ll need to apply for this each year. Also note that if you change jobs during the year, you’ll need to put in a new application to the ATO.

Talk to your accountant

You can apply for a PAYG withholding variation yourself, but I recommend you use your accountant to prevent errors. If your accountant doesn’t know what tax variation is (it happens!), then perhaps consider changing to one who does.

Using this strategy can greatly help your cash flow. It’s one of main reasons many Australians are able to build up a property portfolio.

Important information

The information in this article has been written by Michael Sloan from The Successful Investor. While Mr Sloan has been careful to ensure the information is correct and accurate, Mr Sloan’s views are his own and do not necessarily represent those of National Australia Bank Limited ABN 12 004 044 937, AFSL and Australian Credit Licence 230686 (NAB). This information should not be relied upon as financial product advice as none of the information provided takes into account your personal objectives, financial situation or needs. NAB recommends seek the counsel of an independent financial advisor before making any investment decision.

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