How to massively boost your cashflow with a PAYGW variation
What is a PAYG withholding variation and how does it work?
Simply put, a PAYG withholding variation is a tool used to free up more cash quickly by predetermining your tax rate based on forecasted taxable deductions and keeping your end of year tax estimate as close to neutral ($0) as possible. By forecasting your tax rate and having this implemented through each pay cycle you receive in the year, you are effectively receiving your tax refund throughout the year as opposed to a lump sum at year-end. If you think about it, why lend money to the Government interest free?! It is better to have that money in your hands earlier so you can capitalize on making that money work for you.
PAYG withholding variations can either be increased or decreased. A decreased variation will arise in the instance in which the taxpayer wants to account for additional tax deductions that may be attributed via their rental property, their employment, or any after-tax contributions they are intending to make. An increased variation will generally be actioned in the scenario whereby a taxpayer holds high-yielding assets (share dividends) or a positively geared investment property and wants to mitigate the end of year lump sum tax bill as best as they can.
How to set up a PAYG withholding variation
Step 1: Touch base with your Accountant. They will usually organize this with the ATO on behalf of their clients which this strategy may benefit them, particularly if they’re looking at making a ‘downward variation’.
Step 2: Reach out to a quantity surveyor professional to undertake an assessment of the investment property and construct a 40-year tax depreciation schedule based on their findings. This report will outline all current and future depreciation deductions relevant to that property and should be provided to your Accountant. The higher the depreciation deductions are, the less PAYG withholding is required to be omitted from your salary each pay cycle.
Step 3: Once the request has been approved by the ATO, your employer will make the PAYG withholding adjustment accordingly.
Step 4: PAYG withholding variations should not be considered a substitute for lodging your annual income tax return. You will still be obligated to lodge a return even if in the odd chance you have managed to derive a tax neutral estimate for the end of the year.
Example
Sandy acquires an investment property for $680,000 which she rents out for $550 per week, or $28,600 per annum. The investment property incurs typical rental expenses such as repairs and maintenance, council rates, interest rates, management fees and insurance amounting to $35,000 per annum.
Investment Property purchased for $680,000
| Without Quantity surveyor report | With Quantity surveyor report | ||
|---|---|---|---|
| Annual rental income | $28,600 | Annual rental income | $28,600 |
| Annual rental expenses | $35,000 | Annual rental expenses | $35,000 |
| Rental Depreciation | $0 | Rental Depreciation | $12,382 |
| Total taxation loss | $6,400 | Total taxation loss | $18,782 |
| Tax refund* | $2,566 | Tax refund* | $7,340 |
| Fortnightly PAYG cash difference | $99 | Fortnightly PAYG cash difference | $282 |
Quantity surveyor report deriving a $183 fortnightly cash difference
*Based on a tax rate of 37%
As the above case study displays, a PAYG withholding variation affords Sandy more opportunity by creating access to more liquidity on a regular basis as opposed to a lump sum figure at the end of the year with no applicable interest income paid out.
Having access to this extra cash earlier can provide investors with the opportunity to invest in other opportunities or potentially look to reduce current loan liabilities. Either way, a great strategy for investors to consider.
If you’d like some assistance with varying PAYGW instalments, contact LINK Advisors and we can guide you through the process.