How can Tax Withholding Variation improve your cash flow?

Posted in Money basics
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Authored by Michael Sloan, Director of The Successful Investor

With most tax deductions we wait for the financial year to end, submit our tax return and wait patiently for our refund.

That’s fine for most tax deductions, but for property investors it can create cash flow problems. That’s because the tax breaks are so big they can’t afford to wait until the end of the financial year. For most investors it’s the tax breaks that make it affordable to own an investment property in the first place.

For example, have a look at these figures for one year on a sample investment property.

Rental income $18,279
Interest expense $25,238
Other general expenses $3,751
Pre-tax cash flow -$10,710

So $10,710 per year, or $206 a week, is needed to support this property while you wait for your tax return. Imagine you had two or more investment properties, could you find $20,000 to $30,000 a year?

Now let’s take a look at the figures on the same property, including tax breaks.

Rental income $18,279
Interest expense $25,238
Other general expenses $3,751
Tax break (deductions) $8,141
After tax cash flow -$2,569

$2,569 per year, or $49 per week, is obviously much easier to find than $206 a week. As you can see, these tax breaks make investing in property much more affordable.

You can achieve this improved cash flow by applying for a Tax Withholding Variation. This needs to be applied for each year, and allows you to receive your tax breaks each time you are paid by your salary. Once approved, the tax department tells your employer your new tax rate and your take home pay increases. Also remember that if you change jobs during the year, you will need to put in a new application to the tax office.

You can apply for a Tax Withholding Variation yourself, but I recommend you use your accountant to prevent errors. If your accountant doesn’t know what Tax Variation is (it happens!), then perhaps consider changing accountants to one who does.

Using this strategy can greatly help your cash flow. Because of this, it is one of the key reasons many Australians are able to build a property portfolio.


The Successful Investor – Disclaimer

The information in this article has been written by Michael Sloan is provided as an information service only and therefore does not constitute financial advice and should not be relied upon as financial product advice. None of the information provided has taken into account your personal objectives, financial situation or needs.

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Comments

One Response to How can Tax Withholding Variation improve your cash flow?

  1. Tax withholding variation definitely has a positive effect on improving our cash flow. We must seek advice on wealth management techniques by experienced professionals as it is very beneficial. Thanks!

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