Yong-Long Lai

Its that time of the year again when you have to do your PAYG income tax withholding variation (ITWV) applications again

For the people who are new at this I will briefly explain what this mean:

PAYG income tax withholding variation (ITWV) is used for people on the PAYG (Pay As You Go) system, i.e. pretty much everybody who is on a salary will be on PAYG. This just means that your employer is withholding some part of your salary base on your tax payable and sending it to the tax man, Mr ATO.

You might be thinking, what’s the point of all this and how is this going to benefit you? Well If you have tax deductible expenses such as interest on an investment property or margin loan, rates, water charges, managing expenses etc for your investment property etc. What usually happen is that you get a tax refund at the end of the year because your employer has withheld too much tax for the tax man (simply because your employer doesn’t know that you have investment properties or other tax deductible expenses).

By completing a PAYG income tax withholding variation (ITWV) application, you are applying for all those investment deductions to be refunded during the year via reduction in the tax withholding that’s been applied by your employer to your pay checks. This way i seems like you are getting more cash from our pay slips due to the reduction in tax withheld. This money can be used for anything, hopefully you use it to pay for those expenses when it happens or simply to offset interest or even earn interest (whatever you please) instead of sitting in the tax man, Mr ATO’s bank account earning interest for them.

Once you complete this form, the ATO will tell your employer to make the necessary changes to your pay slips. So get on-line today and complete one, especially if you have deductible expenses!

There are two ways of submitting the application

1. completing the e-form and submitting it on-line (highly preferred) => PAYG income tax withholding variation (ITWV) Application (On-line)
2. option printing it out and completing it yourself and ’snail’ mail it to the ATO get your accountant to do it =>
   PAYG income tax withholding variation (ITWV) Application (Paper)

Example:
Here’s a quick example of how PAYG income tax withholding variation (ITWV) will help you:
For simplicity i am going to assume the following:

• Tax rate is 30%( flat rate across all income)
• You get paid monthly
• You earn $50,000 a year
• You have $12,000 worth of investment expense (net cost from your
• Investment properties or margin loans etc) which is charged monthly

BASE CASE

• Your taxable income is $50,000, so your tax payable is $15,000 (30% x$50,000)
• Your employer will withhold 30% ($15,000 per year) of your salary and send it to the tax man
• This means your monthly pay slip is $2,916.67 ($35,000 / 12)
• You will need to spend $1,000 for your investment expense monthly
• This leaves you with $1,916.67 for your living expenses and savings per month
• You get a huge tax refund at the end of the financial year $3,600 (30% x$12,000)

AFTER PAYG income tax withholding variation (ITWV)

• Your taxable income is $38,000 ($50,000 – $12,000), so your tax payable is $11,400 (30% x $$38,000)
• Your employer will withhold 30% ($11,400 per year) of your salary and send it to the tax man
• This means your monthly pay slip is $3,216.67 ($38,600 / 12)
• You will need to spend $1,000 for your investment expense monthly
• This leaves you with $3,216.67 $2,216.67 [edited - great pick up Sheng] for your living expenses and savings per month
• You get NO tax refund at the end of the year, but you received $300 more a month which could be better used in your hands than the tax man, Mr ATO’s hand

So the question is will you be doing your PAYG income tax withholding variation (ITWV)? or at least find out from your accountant what this is all about!

Tags: tax, cashflow, income tax withholding variation, itwv, payg

Here is a list of things to consider when purchasing property, especially investment property

Start Up Cost

• Stamp Duty ( ACT Revenue Office)
• Legal Fee (Conveyancing)
• Lender’s Fee (Bank Application Fee, Mortgage Stamp Duty)
• Property Inspection (Not Really Needed For Newer House)
• Pest Control – BudgetPestControl
• Depreciation Schedule – Deppro

Useful Resources

• Tax Consideration (ATO) – The Rules
• Increase Your CashFlow – Variation Of PAYG
• Know Your Tax Rate – ATO
• Property Sourcing Agent (Melbourne) – mCorp
• Property Analysis Software – PIA
• Mortgage Broker – Investor Finance

Grants – Free Money

• First Home Owner Grant
• First Home Owner Rate of Stamp Duty
• Home Buyer Assistance Fund

All investors MUST get a depreciation schedule for their investment property! This is a MUST, if you don’t you are literally throwing money away!

This is a short list of some of the advantages of Property Investing

• Banks will lend 80%, 90%, 95% for a residential property, some banks will lend up to 105%
• Worst case scenario, banks will lend 70% for residential property (Pure Asset Finance)
• In Australia you will receive a tax benefit for negative gearing to ‘buffer’ short term losses
• Potential to claim depreciation (paper losses) – this will increase your ‘buffer’
• Statistically, Australian property price doubles every 7-10 Years [ 1][ 2] – Could It Be Inflation?
• Everybody needs a place to live (one of the four basic necessity in life)
• Will the bubble last? – Maybe/Maybe Not

Obviously this is not a comprehensive list, please feel free to contribute if you see its necessary

In the following example we step through the differences between:

• Renting a house at $307 per week ($16,000 per year)
• Buying a $400,000 house to live in (hence saving rent)
• Buying a $400,000 house as an investment, renting it to a tenant and renting a house to live in

Renting from others you would expect the only cash outflow to be the rent of $16,000. Buying a house to live in, you would expect to have an outflow of $33,400 (assuming you borrow 95% and the interest rate is 8%). In addition to the loan cost, you would need to pay for the council rate, water rates etc.

You don’t need to be genius to figure out that it is not worth buying a house to live in given the market conditions.

In the third example, which is hardly ever talked about in the news, newspaper, magazines, we can see a slightly different scenario. The investment house would cost you $30,400 in interest payment and $3,000 in rates expense. However you will receive an income of $16,000. The net cash loss is $17,400 however you will also receive a paper loss of $3,000 from depreciation, making your net loss $20,400.

This is where things gets interesting, the Australia Tax Office allows negative gearing and will give you a tax refund of your highest marginal tax rate of the total (cash and paper) loss amount, in this example $20,400 x 40% = $8,160. This will make your investment property cash loss drop from $17,400 to $9,240 ($17,400 – $8,160). This mean it only cost you $9,240 to hold this investment property every year.

This example does not end here, taking the investment property loss of $11,240 and adding that with the rent you will need to pay to live in a rental property will bring your total after tax cash flow to $25,240 ($16,000 + $9,240).

What does this all mean? The gap between renting for the rest of your life and owning your own dream house is actually not as big as you think. All you need to do is think outside the box and obviously not live in your ‘dream’ home. Just make your rental property the dream house. Remember the difference between “Buy to Live” and “Buy to Rent, Rent From Others” is $8,160 ($157 per week) this could mean a car, or a very expensive rental house, or maybe a holiday, or another investment property, the choices are limitless.

*The above is only an example and different people will have different financial situation, the example also does not include the cost of purchasing the property, such as stamp duty, conveyancing, legal cost etc.

Okay, this is a simple example for all the ‘green’ or ‘wannabe’ property investors out there. It doesn’t take rocket science to figure this out.

• Purchase A Property Worth $400,000
• Borrow 95% x $400,000 = $380,000
• Rent It Out @ 4% Of $400,000 = $16,000 Per Year
• Pay Interest @ 8% On $380,000 = $30,400 Per Year
• Negative CashFlow Of $14,400 ($30,400 – $16,000) Per Year
• Wait 10 Years, Property Market Should Have Doubled
• Property Worth $800,000
• Total Gain $800,000 – $400,000 (Purchase Price) = $400,000
• Total Expense: $20,000 (Deposit) + 10 Years x $14,400 (Holding Cost) = $164,000
• Net Profit $400,000 – $164,000 = $236,000 Over 10 Years
• Approximately $23,600 Profit Per Year

I’m sure there are skeptics out there thinking the above tutorial to property investing is way too simple. All I can say to those people are ‘get over it’. The faster you realise there are people making money outside of their 9-5 JOB, the harder you will kick yourself to get out of the rat race! Do yourself a favour and think outside the box.

Obviously the example above assumed rent, interest rate, inflation rate are constant and also did not take negative gearing, stamp duty and tax into consideration. But just remember, the more time you spend counting the less time you have to actually invest.