If you do, you need to consider whether you should apply for a variation to the amount of tax deducted from your wages each pay period. Preparing the application now will mean that the reduction will be in place for the start of the new financial year.
Before we proceed, I must emphasise that this arrangement has little or no long-term benefit but for some people, assistance with immediate cash flow strains is a visible benefit.
Here is how it works:
John (not his real name) earns $100,000 each year and as a negatively geared rental property producing a $12,000 loss each year. When John lodges his annual tax return, he receives a refund of $4740 because of that loss. During the year, John’s employer has deducted $27,000 from his pay, but because of the rental property, only $22,300 is really payable. John is “lending” just over $90 a week to the tax office.
Now, some people prefer to receive a significant refund when they lodge their returns but others are not quite so generous and prefer to have the use of those funds during the year. For these people, the variation application is the answer. Let’s return to John’s case.
John applies to the tax office for a variation to the amount of tax deducted (not it’s technical name by the way) and, as a result of the application, the tax office authorizes John’s employer to deduct $90 per week less from his income. This means that John takes home a pay increase by $90 per week. John uses that extra to make the monthly interest payments on the investment property loan. Alternatively, he banks it into an interest bearing account where is works for him rather than helping to fund the government’s deficit.
At the end of the year, John lodges his tax return showing a taxable income of $88,000 ($100,000 minus $12,000). He also claims a credit for the $22,300 his employer has deducted from his income during the year. As this is the actual amount payable, John does not receive any refund.
It is important to realise that the same amount of tax is payable with or without the variation. The only variable is how the tax was collected but, with the variation, John has the use of his money much earlier.
A few other points to note;
- The application form Is not simple but, if you lodge your own return, you should be able to complete it successfully. Ig you engage an accountant, consult them.
- The information on the application must be reasonably accurate. If you significantly over state the expected loss, you may be subjected to penalties when you lodge your return.
So if you have this type of investment, perhaps investigate this option, as it may suit you.