The Benefits of a Pay As You Go (PAYG) Withholding Variation
Choosing to use a Pay As You Go (PAYG) withholding variation, can provide property Investors the opportunity to optimise their cash flow by altering the amount of tax their employer withholds each pay cycle. This article sheds light on the mechanisms, benefits and the interplay of depreciation, in enhancing cash flow through a PAYG withholding variation.
What is a PAYG withholding variation and how does it work?
A PAYG withholding variation, allows an individual to vary the amount of tax withheld by their employer each pay cycle.
There are two parts which consist of an upwards and a downwards variation.
A downward PAYG withholding variation, leads to an increase in the investor’s net pay. It does this by considering additional tax deductions and depreciation when relating to an investment property, reducing the amount of tax withheld each pay cycle. This mechanism serves property investors who wish to have access to their negative gearing tax benefit each pay cycle, rather than waiting for their annual tax refund.
An upward PAYG withholding variation simply increases the tax amount withheld with each pay cycle and is designed to cover an estimated shortfall at tax time and to avoid a tax bill. This doesn’t require an application to the ATO, it simply requires a notification to your employer.
For the purposes of this article, we will refer to a downwards variation.
How to set up a PAYG withholding variation in 4 simple steps:
1. Consult an Accountant
An accountant will set up a PAYG Withholding variation by providing estimated financial details for the relevant tax year to the Australian Taxation Office (ATO). This is done in advance, so get it done as soon as you buy a negatively geared property, or before the start of the tax year.
2. Understand Your Deductions
Familiarise yourself with the potential tax deductible expenses and depreciation associated with your investment property. This knowledge will guide you on the expected adjustments to your taxable income and therefore the effect on your overall tax payable for the year.
3. Approval and Execution
Once the ATO gives the green light on your request, inform your employer about the necessary changes in your PAYG withholding. Your employer needs to make a tweak in their payroll system so that your future pays are processed.
4. Annual Review
It's essential to remember that a PAYG withholding variation doesn't nullify your annual tax return obligations. Make sure to see an accountant annually as the variation only lasts for a single financial year.
Case Study: The synergy of PAYG withholding variation and depreciation deductions
Anna buys a modern house for $780,000, which she rents out for $680 weekly - equating to $35,360 annually.
Her yearly expenses include; interest, rates, repairs, maintenance, property management fees and insurance which totals $45,000.
| Without depreciation claim | With depreciation claim | |
|---|---|---|
| Annual rental income ($680 x 52) | $35,360 | $35,360 |
| Annual Expenses | $45,000 | $45,000 |
| Depreciation deduction | $0 | $15,538 |
| Total taxation loss | $9,640 | $25,178 |
| Tax refund* | $3,566 | $9,316 |
| Fortnightly PAYG cash difference | $137 | $358 |
*Based on a tax rate of 37 per cent.
Without claiming depreciation, Anna gains an extra $137 in her pocket every fortnight from her downwards PAYG withholding variation. If she includes the $15,538 depreciation claim, Anna gains an extra $358 in her pocket every fortnight. The depreciation claim leads to an added $221 per fortnight cash flow benefit.
It's these fortnightly cash flow benefits which can be used to help cover expenses required to own and maintain a rental property. Often these savings are used to help service a loan to purchase or renovate the property.
The main advantage of a downward PAYG withholding variation is its capacity to provide investors access to funds during the year instead of waiting until tax time.
Your next steps
Always remember, your financial decisions should be well-informed. Consult professionals and make sure you're optimising your cash flow in the best way possible for your situation. If you're keen to learn more about PAYGW Withholding variations or want advice on how an investment property would affect your tax position, book a time with an expert from LINK Advisors.
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General advice disclaimer
The information provided on this website is a brief overview and is general in nature. It does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision. Please consult with an appropriate professional before making any decision.