With the end of the financial year fast approaching, it’s a good time to think about what you can do to maximise your tax deductions. One of the easiest ways to boost your tax return is by taking advantage of the deductions you’re able to claim. Claiming tax deductions reduces your taxable income, meaning you’ll pay less tax and hopefully get a bigger tax return.
In this blog, we’ve listed our top three ways for easily claiming tax deductions. Read on to find out how you could maximise your deductions coming up to the end of the financial year.
1.APPLY FOR A PAYG WITHHOLDING VARIATION
Property investors often rely on tax breaks to make money on their investment. However, waiting until you file your tax return can cause serious cash flow challenges for some so using a PAYG withholding variation is a great tool for savvy property investors.
A PAYG Withholding Variation (used to be known as a Section 221YD variation) allows you to access the tax benefits of an investment property each week to help relieve cash flow restrictions throughout the year. Rather than waiting for the financial year to end, then submit your tax return and wait patiently for your refund you can access your money sooner.
Many people like to get a big tax refund at year end, but why wait for your refund? We find that some people spend it on a holiday or treat themselves when in fact it might be better used paying down your home loan, reduce debt or go towards holding costs of your investment property. We find those with PAYG withholding variations tend to use the money more wisely than those receiving a lump sum.
You can lodge a Pay As You Go (PAYG) Withholding Variation which if accepted will direct your employer to withhold less tax from your pay and give more cash to you during the year.
In particular people who have several properties may find it a good strategy to help cover costs and manage their cash flow.
Why not get it now? The Tax Office allows you to do just that. Here’s an example to show you the benefits:
CASH FLOW ON AN INVESTMENT PROPERTY — A CASE STUDY
For example, if purchasing a typical $400,000 investment property over one year.
Rental income – $19,000
Interest expense – $27,000
Other general expenses – $4,000
Pre-tax cash flow (negative) – $12,000
So you need $12,000 per year—or $230 each week—to support this property while you wait for your tax return. If you had two or more investment properties, you’d need to find $24,000 to $30,000.
CASH FLOW — WITH TAX BREAKS
Here’s the figures on the same property, including tax breaks.
Rental income – $19,000
Interest expense – $27,000
Other general expenses – $4,000
Tax break (deductions) – $7,560*
After-tax cash flow (negative) – $4,440
Now, $4,440 per year—or $85 each week—is obviously easier to find than $230 a week. It’s clear these tax breaks make investing in property much more affordable.
*Assuming all the expenses are deductible as spent and total income is above $100,000, with the marginal tax rate of 37% (excluding Medicare and other levies).
How to apply for the variation
Firstly you should discuss this option with your accountant to confirm that you are eligible and that this is suitable for you. Read more about how a variation could be advantageous for you HERE.
2.ARRANGE YOUR PAPERWORK
It can often be overwhelming at tax time if you are not organised and have an efficient system for your paperwork. Getting your tax documents together throughout the year might seem tedious but come July that extra organisation has benefits.
There are numerous bits of paperwork including loan statements, rates, water, insurance, lease agreements and if you have more than one property, it can be even more harrowing trying to keep it all together.
This is just another way to avoid falling in to the traps most investors make?
Here are our top tips to stay on top of tax time this year:
- Use software to record your expenses: Something simple like an Excel spreadsheet will be beneficial in keeping up to date with your spending throughout the year.
- Make a habit out of staying organised with paperwork: Schedule a time each month to sit down and make your tax a priority. This will avoid things piling up and getting out of control and will alleviate hours spent in July trying to sort stuff before lodging your tax return.
- Arrange a dedicated place to keep tax documents: It could be a lever arch file, a physical shelf on a bookcase or a digital folder in a cloud application like Google Drive, OneDrive or Dropbox. File all of your tax spreadsheets, your book keeping records and your receipts. This way you won’t spend hours tracking down the documentation you need in order to lodge a return because it’s already in one spot. Many suppliers already provide statements electronically – rates, banks and real estate agents.
- Download an app on your phone to help you organise receipts: Keeping record of lots of receipts and invoices can be difficult to keep track of. Many of our clients simply photograph their receipts and store them in an app that makes it easier to find and categorise later in the financial year.
Being organised throughout the year is a good idea to relieve any unnecessary stress and it will help you feel in control of your investments. To learn more about what you might be able to claim visit the ATO’s guide for rental property owners.
3.REVIEW YOUR LOANS
This should be done on a yearly basis, very much like your insurances. Interest paid on your investment loans will be the most significant expense and even though it is tax deductible it’s always good to reduce your holding costs.
It’s always best to speak to a mortgage broker who specialises in investment debt to do a review of your loans and find out what is available, based on your personal circumstances.
BONUS TIPS TO MAXIMISE YOUR TAX REFUND
- Obtain a quantity surveyor report so you can claim Div 43 building write-off. This can be a significant deduction.
- Pay any rates and insurances etc due in July when they are issued in June.
- Conduct any small repairs to maximise this year’s tax refund. Don’t wait until later in the year.
- Prepaying interest on the loan or additional super contributions may be beneficial. Often if you’ve had a redundancy, distribution or capital gain this can be a good idea.
Please note: We recommend that you speak with a qualified tax agent before taking any action that may impact your tax position and a financial planner before making additional super contributions. Remember tax agent fees are also a tax deduction.
Please call us on 08 6323 2306 or inquire online if you would like to know further information about how to prepare for the end of the financial year.
