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What could you do with extra cash each fortnight?
Save on interest costs by paying a current mortgage off faster? Save more quickly for the next investment property deposit? Go on a holiday? There are so many possibilities…
Why not consider a Pay As You Go (PAYG) variation?
Often overlooked by investors, the PAYG system is a great way to increase fortnightly cash flow throughout the year. The PAYG method of tax collection was introduced in July 2000 to replace previous versions of the same system, such as pay as you earn (PAYE). The system gives the option of claiming back tax regularly, rather than in one lump sum at the end of the financial year. A PAYG variation means that the property owner’s employer will reduce the amount of tax withheld to reflect set deductions like depreciation on a rental property. In essence, it is a way of decreasing the amount of tax paid by the investor each pay period.
It is important to note that submitting the PAYG variation does not replace a normal tax return. A tax return still needs to be filled at the end of the year to calculate the actual amount of tax liability. Your PAYG instalments for the year are credited against your assessment.
A Quantity Surveyor can provide all current and future depreciation values for investment properties in a detailed tax depreciation report. Obtaining the report immediately after the purchase of a property will allow the maximum return from a PAYG variation, as the precise figures will make the instalments accurate.
The flexibility provided to the investor through a PAYG variation, combined with depreciation deductions identified by a Quantity Surveyor, can be of great help in managing the fortnightly cash flow of an investment property.
Lets consider a hypothetical situation:
A typical $400,000 investment property would show an average annual loss (or deduction) of $35,000 and an average income of $200,000 for the first 5 years. The deductions include costs such as interest on a $350,000 mortgage, management fees, maintenance and property depreciation. The total loss (income minus expenses) will result in a deduction for the owner of $15,000. In the 37% tax bracket the $15,000 deduction could generate a tax return (or credit) of $5,550. Under a PAYG variation, the investment property owner can adjust their fortnightly pay to anticipate this return, adding $213 to their pay packet each fortnight.