How to improve cash flow as a property investor through income tax variation
Did you know that you can receive a portion of your tax return in your salary throughout the year?
Most investors wait for the end of financial year to lodge a single tax return in hope of receiving a lump sum of funds which had been withheld for the period. Investors will usually receive money back as they can claim expenses including interest, maintenance, property management fees and depreciation.
One way investors can significantly increase their cash flow throughout the financial year, rather than just at tax time, is by lodging an Income Tax Variation (ITV).
An ITV is an annual application to the Australian Tax Office (ATO) to vary the amount of tax withheld by your employer. Investors can request the ATO to vary the amount of PAYG tax withheld from their salary, ultimately meaning more money in the bank each pay period. Strategic investors will then put these funds towards the costs of their investments including loan repayments, utility bills, property management fees, and so on.
How an ITV can improve cash flow: A case study
For example, let’s say you have an investment property worth $450K. If you receive $23K in rental income, pay $35K in interest and $4K in general expenses; your pre-tax cash flow equals negative $16K. That equals $308 a week that you need to support this property while you wait for your tax return.
Alternatively, if you have lodged an ITV, you will receive your tax breaks each time you’re paid. If your after-tax cash flow equals $9K a year, you’re left with $5K a year, or just $96 a week to cover – which is much easier to manage than $308 a week.
Negatively geared properties
Those who have a negatively geared property investment will end up having a smaller taxable income than what their employer has estimated, due to their rental property loss offsetting their employment income.
As a result, investors with negatively geared investments will be paying too much tax and can attract significant tax savings and refunds. These funds are held by the ATO until the annual tax return is lodged unless there is an ITV in place.
Although it may be nice to have a lump sum of cash come tax time, having additional money to pocket throughout the year can take the stress out of ongoing property payments and obligations. Astute investors use this extra cash flow to add to their property portfolio.
To find out more about whether an ITV is right for you contact me on 02 9522 3000.
This article is the first in our article series – Cash flow secrets for property investors. Watch this space for more great tips!