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A tax variation allows Australian property investors to adjust their tax withholding, improving cash flow by receiving anticipated tax deductions throughout the year, rather than at year's end.
A tax variation (also known as a PAYG Withholding Variation or Section 221D variation) is a tool that property investors in Australia can use to better manage their cash flow throughout the year.
A tax variation allows property investors to adjust the amount of tax withheld from their salary by their employer, taking into account the expected tax deductions from their investment property. This means instead of receiving a lump sum tax refund at the end of the financial year, investors can access the benefits of their deductions throughout the year via increased take-home pay.
Property investors estimate the deductions they expect to claim at the end of the financial year. This could include interest on loans, property management fees, depreciation, maintenance costs, and other expenses related to the investment property.
The investor lodges a PAYG Withholding Variation application with the Australian Taxation Office (ATO), detailing these expected deductions. This application is generally done through an accountant, tax agent or financial advisor.
Once the ATO approves the application, it sends a variation notice to the employer, instructing them to reduce the amount of tax withheld from the investor's salary. This adjustment increases their net pay during the year.
By reducing the tax withheld, investors receive more cash in hand each pay period. This additional cash flow can be used for various purposes, such as paying off the investment loan faster, reinvesting, or covering ongoing property expenses.
At the end of the financial year, the investor lodges their tax return as usual. The ATO will reconcile the total income, deductions, and tax paid to ensure the correct amount of tax has been withheld. If the variation was accurately calculated, there should be minimal tax payable or refundable.
Increased cash flow can help with paying down debt faster or managing property expenses.
A tax variation is a practical tool for property investors to optimise their cash flow by aligning tax withholding with expected deductions from their investment property. It requires careful planning and accurate estimation but can be highly beneficial for managing ongoing financial commitments.
DPN recommends you seek independent financial advice from a qualified and experienced accountant or financial planner before choosing this strategy.
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