The little known tax strategy that first time property investors don’t know about…

Purchasing your first investment property is an exciting time. The feeling that you’ve taken a significant step towards building wealth over the long-term is pretty awesome. Whilst there is a lot of information available on tax deductions and the tax benefits of negative gearing, there is one tax strategy that doesn’t attract much of the limelight.

PAYG Variation

Property investors will often rely on the tax deductions relating to their investment property to be able to make money from their investment. Most first time property investors assume that you must wait until you submit your tax return before you can reap the benefits of these tax deductions… which isn’t true. A PAYG variation allows investors to receive a portion of their tax deduction each time they are paid. So effectively, the investor will receive the tax deduction throughout the year, rather than having to wait until tax time. This drip-fed tax deduction can have a positive impact on your cash-flow by increasing your regular take-home pay.

Without a PAYG variation, waiting until tax time can be painful for property investors. Why? Because their tax breaks are so substantial that they burn a hole in their pocket (or bank account!). For some investors, it is these tax breaks that make property investment affordable, so waiting until tax time may not be very problematic for their cash flow.

So how do you go set up a PAYG variation? It is possible to do it yourself, however it is easier (and highly recommended) to outsource this to your accountant. This reduces the likelihood of errors and also gives your accountant the heads-up about what is going on in your tax situation so there are no surprises at tax time. Your accountant will submit the PAYG variation to the tax office, who will then assess the application. Once approved, the tax office will inform your employer of your new tax rate. Your employer will then factor this into you pay and your take-home pay will increase!

It is important to know (and to remember!) that the PAYG variation will have to be submitted each year or if you change employer. This is another benefit of having your accountant involved… they should know to remind you, if you do end up forgetting. Another important point is that your actual tax liability isn’t calculated until you lodge your tax return. This means that if a mistake is made, you may be required to pay back an overpaid amount. However on the flip side, if you’ve underestimated the deductions, you may receive a further refund.

I regularly see property investors who haven’t taken advantage of this cash flow hack. It’s important to involve your professional adviser (in this case, your accountant) so they can help increase your cash flow as soon as possible after your have purchased an investment property.

Author: Shane