18 Dec PAYG for investors – Brad Beer
Investors often wait until the end of financial year to take advantage of depreciation and the other deductions they are entitled to, but there is a method which allows investors to receive their deductions more regularly. Brad Beer explains how a PAYG withholding variation works and why this process will help investors.
Kevin: Investors wait until the end of a financial year to take advantage of depreciation and the other deductions that they’re entitled to, but there is a method which allows investors to receive their deductions more regularly. This involves submitting a Pay As You Go (or PAYG) withholding variation with the help of an accountant. Brad Beer from BMT Tax Deprecation joins me.
Brad, can you explain how a PAYG withholding variation works and why including depreciation claim in this process is going to help investors?
Brad: Yes, sure.
Kevin: And hello, how are you?
Brad: It’s great to be here Kevin, as always.
In about July 2000, they introduced the PAYG variation, and one of these is the legislation that simply allows you to change the way that the tax is paid or when it’s paid.
At the moment, you go to work, your employer pays you each fortnight or month, whatever it is, and they actually hold on to the tax and pay it to the government. You can actually have one of this adjustments done and say, “Look, I’m going to have some deductions this financial year and rather than the employer taking that tax out for me, how about we take out how much tax only is needed to be taken out through the year? And therefore, I’ll pay less tax throughout the year and increase the cash flow through the year.”
It means you don’t get a good tax return at the end of the financial year because you’ve already worked it out, but it’s a good way to keep hold of your cash rather than allowing it to be with the tax office for that year.
Where a depreciation schedule fits into this is that depreciation is one of those deductions that because it’s a non-cash deduction, at the end of the year, you get this quite substantial deduction that you haven’t paid out.
What happens is you end up by reducing substantially your tax through the year instead of getting a big tax return at the end of the year. It’s just one of the deductions that comes into that and it makes a pretty big difference because it’s a non-cash deduction and the employer keeps the tax and gives it to the tax man and you could have that money and put it into your offset account or help reduce debt through the year instead.
Kevin: Further to that, just to take that a little step further, what difference can a depreciation claim when it’s combined with submitting a PAYG withholding variation make to an investor’s cash flow, just from your experience, Brad?
Brad: A simple example of a property worth about $500,000. We’d see the deduction in the first year for depreciation to be about $10,000 on something like that. So, claiming or not claiming depreciation, it will depend on your marginal tax rate, but with a 37% marginal tax rate, a little case study that says “Don’t claim it, do claim it,” the difference between the cost of owning a property of that sort of value is in the vicinity of $160 a week. That’s a fair bit of money, because a $10,000 deduction makes a big difference if you don’t pay it out.
We invest in property to make money at the end of the day, and you do that through capital growth and through cash flow. Capital growth: you need to choose them in the right areas and do those sorts of things. And cash flow is maximizing the rent, minimizing the interest and the expenses, and maximizing the depreciation – and so you might as well get it.
Kevin: I know how delighted I’d would be if a tenant offered to pay me an extra $160 a week. I’d be pretty happy about that. That’s for sure.
Brad: You can’t rent it for $160 a week over market because it will be vacant.
Kevin: That’s right; exactly.
Brad, does a PAYG withholding variation negate the need to submit a tax return?
Brad: No. What it is it’s a variation to what your tax return will look like at the end of the year. Your accountant does it. I’m not the accountant, but what it means is you’re estimating what the year is going to look like based on what you know, rather than the traditional method, which is you get to the end of the financial year, you submit everything to the tax office, and they give you the tax return.
You still need to do that tax return, but this is up-front telling the tax office before it happens, what’s really going to happen, because you know.
Kevin: What advice do you recommend investors should seek out before the consider taking up this option, Brad?
Brad: It’s a discussion with your accountant, because it doesn’t necessarily work for every type of taxpayer. Most people or a large percentage of people are salary- and wage-earners in this country, and then your employer takes some taxes out of your check every time they pay you.
If you’re in a situation based on deductions that you know are going to happen – like property deductions, depreciation – is going to be different by the end of the financial year and you know that, it’s the time where it’s probably worth it. But talk to the accountant about that first and make sure it’s going to be available before you go and try to do one.
Kevin: Great advice. Something interesting, Brad, because it’s something I didn’t know about, so thanks for enlightening us. Brad Beer from BMT Tax Depreciation.
Brad, thanks for your time.
Brad: Thanks Kevin. A pleasure, as always.