Get them NOW – your investment property tax returns on pay day
Whether you are a first time property investor or a property portfolio owner, cash flow is critical. There are many ongoing, and sometimes surprising, costs associated with holding investment properties.
Numerous unending costs include insurance, body corporate/strata fees, council and water rates, property management fees, land tax, maintenance and repairs.
Let’s not forget other challenges of managing property investment cash flow:
• Vacancies – there may be times when your property is not tenanted and you may have to cover the costs yourself
• Interest rates – if interest rates rise, larger repayments could widen your income versus expenses gap
Plus there are considerations at the time of buying and selling such as entry and exit costs and property valuation fees.
Can you afford a cash flow shortfall?
Managing your income (rent from your tenant) versus your expenses is important in managing your overall surplus or shortfall.
As reported by CoreLogic in their ’25 years of housing trends report’ as of March 2018, property investors were 42.8% of the mortgage demand – more than double the proportion of 25 years ago. Now that’s a lot of investors having to manage their cash flow.
If you have negatively geared properties in your property portfolio (where the income from your investment is less than the expenses) then you would be contributing your own money to hold the property.
Most investors then boost their tax return at the end of the financial year through tax-deductible rental property expenses.
This may seem straight forward for single investment property owners, but for those with a portfolio, the ongoing costs could put a strain on their own funds and cash flow.
Let’s look at an example from ASIC’s Money Smart site:
Case study: Juhyan and Jennifer consider an investment property
Juhyan and Jennifer are considering buying an investment property. They spot a unit that ticks all of their boxes: it’s close to a train station and is a 10 minute walk to restaurants and shops.
The property price is $550,000 with buying costs of $23,000. They have a deposit of $150,000 so they will need to borrow $423,000 to complete the purchase. Their monthly income and expenses are expected to be:
Income and Expenses $
Rental income $2,250
Less loan repayment -$2,725
Less allowance for expenses -$225
Less strata fees -$216
Less allowance for repairs and maintenance -$500
Monthly shortfall -$1,416
Juhyan and Jennifer can cover the monthly shortfall with Jennifer’s salary, which they currently save. They also have an emergency fund they can draw on if they were suddenly without tenants for a while.
If Juhyan and Jennifer were to purchase say another three similar negatively geared properties, then they would be in for quite a shortfall!
Did you know you can use the tax system to your advantage?
Instead of waiting for your end of financial year tax return, you may be better off paying less tax throughout the year to subsidise the continuing outgoing expenses of your properties.
By completing the ATO PAYG withholding variation application, you can vary or reduce the amount of pay as you go (PAYG) tax that is withheld from your salary each pay period. This may be preferable if your normal rate of taxation leads to a large refund at the end of the year because it does not take into account your investment deductions. See the ATO website for more details.
How does it work?
Your regular cash flow is increased (less tax paid each pay – so more in your pocket) allowing you to: accelerate your debt reduction; put more in your offset account to reduce the interest accumulating; build up a deposit along with your current property equity for your next purchase and of course to help you with any shortfall for covering your property costs each month.
Beware – conditions apply!
The Australian Tax office clearly states that “We will process your application only if 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
• did not receive a debit assessment on your last tax assessment (if you also had an approved withholding variation for that year)
• do not have any outstanding tax debt owing to the Australian Government
• do not have any outstanding debts under any other Acts administered by us.”
The application is valid for one financial year only. So that better be on your to-do list each financial year if you intend to continue using this strategy.
Importantly, don’t dive into investment property ownership without assessing your overall asset strategy, cash flow and budget management – you don’t want to be caught short each month!
Investing in property can be daunting. Let us help you to make it a rewarding step in your life by starting with our ‘10 Steps to successful property investment’.