The issue with tax deductions

Think about most tax deductions. We wait for the financial year to end, submit our tax return, and wait patiently for our refund.

While this is fine for most people, it can create serious cash flow problems for property investors – as their pending tax breaks are so big they can’t afford to wait until the end of the financial year.

For many investors, tax breaks make it affordable to own an investment property in the first place.

To highlight the importance of PAYG withholding variation, let’s look at an example.

Cash flow on an investment property – a case study

Here’s a breakdown of 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.

According to these figures, you’ll need $12,000 per year (or $230 each week) to support the 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 sums on the same property, including tax breaks.

  • Rental income - $19,000.
  • Interest expense - $27,000.
  • Other general expenses - $4,000.
  • Tax break (deductions) - $9,000.
  • After-tax cash flow (negative) - $3,000.

Clearly, $3,000 per year (or $57 each week) is easier to manage – these tax breaks make investing in property much more affordable.

PAYG withholding variation

This is where PAYG withholding variation comes into play, allowing you to receive your tax breaks each time you’re paid.

Once approved, the tax department tells your employer your new tax rate – and your take-home pay effectively increases.

Keep in mind you’ll need to apply for this each year. If you change jobs during the year, you’ll also need to put in a new application to the tax office.

Talk to your accountant

While you can apply for a PAYG withholding variation yourself, your best option is to use an accountant. If your accountant doesn’t know what tax variation is (it happens), then think about making a switch.

Using this strategy can improve your cash flow. In fact, it’s one of main reasons many Australians are able to build up a property portfolio.

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Terms and Conditions

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.