Richard Sheppard explains how an income tax variation is the smart way to legally reduce your tax each pay day with investment property.
You may have heard that investment property can provide good tax benefits, though did you know that you don’t need to wait until the end of the financial year to claim it all back in one annual lump sum?
A tax variation is a relatively simple way to receive your tax benefits every payday, so one or more investment properties can become much more affordable on a monthly basis. The tax deductions of a negatively geared property can be great, so much so that a fairly new investment property can cost around $50 per week after all the tax benefits. However, if you wait until the end of the financial year to claim them back, the pre-tax holding cost can until then be much higher, at around $250 per week or more, particularly if interest rates increase.
While $250 may be bearable for one property if you want to build a portfolio of properties, this pre-tax cost can be quite prohibitive. Thankfully, a tax variation technically called an Income Tax Withholding Variation (ITVW) or 221D by the Australian Taxation Office (ATO), is a relatively simple way to claim the tax benefits every payday.
A tax variation is essentially just a form that asks for your annual income and the tax deductions to be estimated at the start of the financial year so that your tax benefits can be estimated. Once the form is completed by your accountant or a property investment business, or even yourself with a bit of guidance, it is sent to the ATO to be validated, then the ATO sends a letter to your pay office to authorise them to take less tax out of your pay by the amount of the estimated tax benefits, so by about $200 per week for the above example.
You will still need to complete an income tax return at the end of the financial year. This is in order to confirm what the actual costs were as opposed to the estimated costs for the tax variation. However, if you complete your tax return for the financial year just finished and your tax variation for the year ahead, the information is very similar and your accountant may even give you a discount for getting it done all at the same time.
Don’t overestimate your tax benefits
As you are essentially estimating the tax deductions for the financial year ahead, you don’t actually know exactly what they are, as most of the costs such as interest, maintenance, and insurance can vary. Ensure your accountant underestimates the tax benefits in the tax variation so that you don’t get hit with a tax bill at the end of the year.
You will also need to have your tax returns up to date to lodge a tax variation and if the tax variations are ever too inaccurate, the ATO may disallow it. If you try to complete the variation yourself, be very careful that it is fairly accurate and that you underestimate the tax benefits.
Property tax and cash flow management are just some of the important issues to consider when building an optimised and safe investment property portfolio, so if you would like help with this and all the other important issues, please contact the office.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.