Property investors often factor in tax breaks as part of their overall investment analysis. The saying ‘cash flow is king’ applies not only to the business world but is as relevant to the property investor market. Hanging on until the end of the financial year, and until you file your return can leave you with serious cash flow problems.

What is Income Tax Withholding Variation?

An Income Tax Withholding Variation, previously known as a Section 221YD variation, is an annual application made to the ATO to vary the amount of tax withheld from your salary each pay by your employer.

If lodged part way through the year, it takes into account the amount of tax withheld from your salary to date.

The processing time depends on your chosen application method. An electronic version of the form can be submitted online which generally is within 28 days. The other option is you can print the form and mail it to the ATO which will take longer to assess, generally within 56 days.

Variations are issued at the discretion of the Commissioner of Taxation. Ensure:

• You have lodged all required tax returns and activity statements or notified us in writing if you were not required to lodge tax returns in prior years.
• You did not receive a debit assessment on your last tax assessment (if you also had an approved withholding variation for that year).
• You do not have any outstanding tax debt owing to the Australian Government.
• You do not have any outstanding debts under any other Acts administered by us.

If your application is not approved, you can apply for a review of the decision. You must apply in writing, explain why the decision should be overturned, and include information to support your claims.

Who is it for?

This applies to investors who are employees with a negatively geared property and also applies to investors that have high non-cash deductible investments ie. newer property generally with higher depreciation. The form should be used when the payee (employee) wants to reduce their pay as you go (PAYG) withholding rate for the year ending 30 June next.

How does it work?

Firstly, you should discuss this option with your accountant, financial or property advisor to confirm that it is suitable for you and that you are eligible.

It simply means that a taxpayer who is entitled to a large refund at the end of the year can access the funds each pay period, rather than wait until their annual tax return is completed and lodged.

There are circumstances where a variation may or may not be appropriate or sometimes even necessary. You should always consult your accountant, and financial and property advisor before making any decision or taking any action.

Once processed, your employer will be notified of a ‘varied’ amount of tax to be withheld from your pay. This notification will come from the ATO.

Generally, the ATO can assess applications within 10 work days, so long as they have all the required taxation and property investment requirements. We have provided a worksheet guide as an attachment to help to with what information is required to minimise delays.

Your variation finishes on the expiry date shown on the notice of withholding variation from the ATO.

You need to apply each year.

It is your responsibility to reapply for a future variation if your circumstances require it (e.g. change jobs). It is recommended that you start the application and file for lodgement at least 2 weeks prior to the existing variation expiration.

Why would you want to do it and what to look out for?

Investors who gear their property to gain maximum income tax benefits and who are subject to normal withholding tax from their weekly pay can attract substantial tax savings and refunds.

A refund for just a single property can be quite substantial, let alone if you are holding multiple investments. Without a weekly tax variation in place, these funds are held with the ATO until your annual tax return is lodged.

Having a lump sum at year end is always a nice feeling. It definitely beats having a payable position that’s for sure, but it can put pressure on your weekly cash flow which puts pressures on your lifestyle.

The only trap is that you need to be accurate in your variation estimate otherwise you may have to pay penalty interest on the extra tax that you kept from the ATO.

You can usually make an accurate estimate using your tax return from last year combined with advice from your accountant. This forward planning and forecasting process not only improve cash flow but can also make you more disciplined as an investor.

The additional cash flow can be allocated to improve your lifestyle, repay debt, save or re-invest. It can also increase your overall financial position in the bank’s eyes, which may mean they will allow you to borrow more money.

This is for those thinking about property investing and are not sure how the variation works or is factored in the investment analysis.

Note: In the past, promoter of tax-effective investment products or arrangements, have pushed their clients towards an income tax withholding variations to produce immediate tax savings without accounting for suitability and eligibility status.

If you want more certainty about the tax treatment of an arrangement, ask the promoter if they have a product ruling from the ATO. If the answer is:

• YES – ask for a copy and read it, or have an independent tax professional read it and explain how it applies to you.
• NO – ask why they don’t have a product ruling for the project and apply to us for a private binding ruling or consult a tax professional who is not involved in promoting the investment.
  

Summary

• Most tax deductions are applied at the end of the financial year end after you’ve submitted a return.
• Many investors can’t afford and shouldn’t have to wait until a tax break.
• PAYG Withholding Variation allows investors to receive a deduction each time they’re paid.

Email us at hello@youraccountingpartners.com.au or call 07 3668 0646 to know more about PAYG Variation when it comes to property investing.

James Huy Vuong is a CPA and the owner of Your Accounting Partners. Partnering with businesses from start to scale thru to sale.