The majority of property investors look forward to tax time, gathering their information together as quickly as possible so they can get in to see their accountant and receive their tax refunds from their negatively geared properties, but what if I told you that you didn’t need to wait until tax time to get this money?
API Newsletter Article by Rebecca Mackie, published 20 August 2016
A PAYG Withholding Variation (previously a 15/15 or 221D Variation) is where you can apply to the ATO to have the amount of tax deducted from your wages each pay period adjusted to more accurately reflect your tax position at the end of the financial year.
This is typically done when you have significant deductions and will be owed a tax refund, but can also be used when you have income that has not been taxed, to ensure you don’t have a large tax bill at the end of the year.
If negatively geared investment properties are part of your investment strategy then a variation is a fantastic way to increase your cash flow and decrease the day-to-day stress of the properties income being less than its expenses.
The form provides the ATO with your estimated salary (and tax withheld from that salary) as well as your property rental income, and all expenses. The ATO will calculate your taxable income and the overall tax payable, then they send your employer a letter saying they should withhold tax at a specific percentage rate.
Variations are not just for those with negatively geared property. You can also lodge one if you have a negatively geared share portfolio, or substantial car expenses.
As an example, Jodie earns a salary of $100,000. Her rental property generates income of $25,000 and has expenses of $40,000 including depreciation and interest. This means Jodie’s taxable income for her variation is now $85,000. The ATO will use this to recalculate her tax percentage. This additional cash in your fortnightly (or weekly or monthly) pay packet can make a huge difference to affordability, and also your overall property investment strategy.
The lodging of a variation, and the granting of an adjusted rate by the ATO, does not mean they accept the tax treatment of your estimated income and deductions – you still need to lodge your tax return to determine your final tax position.
It’s also important to point out that if you vary your rate to below your final tax liability, the ATO can (and have) denied future variations, so it does pay to be conservative in your estimates.
Rebecca Mackie, Partner, Paris Financial