The Australian Tax Office
assists the investor
When a property is negatively geared, and tax rebates calculated, the investor has the option to either collect the credits progressively over the year or to wait until the end of the financial year and receive the refund then.
Which option you choose will depend on your circumstances, cash flow, fiscal discipline and preferences.
The Australian Tax Office provides online access to submit a variation, though relying on professional assistance is recommended.
If cash flow is not an issue, perhaps for a first or second property purchase, the investor can elect to hold off and wait until the end of the financial year to receive their entitlements.
In the case below, the investor decides to carry all the costs of ownership and wait until the end of the financial year to collect their rebates, in a lump sum or offset against other tax outstanding.
In this case, what would be due from the ATO is foregone and carried by the owner until the EOFY. The out of pocket or holding costs, therefore, are more substantial pay by pay.
This constitutes forced saving. Remember the opportunity cost! Covering the expenses along the way will prohibit some discretionary spending, but that may be a beneficial strategy for those who struggle with delaying gratification!
You are effectively giving the tax office an interest-free loan of your money!
The alternative is to collect the tax rebate entitlements each week (may also be fortnightly or quarterly depending on the investor’s pay period).
The pay office takes less tax out of each pay in line with an Income Tax Withholding Variation form submitted to the ATO.
As an example, if your accountant calculates that you will be entitled to a $7215 rebate at the EOFY, you can elect to have $138.75 ($7215/52 = $138.75) less in tax withheld. Your pay office adds that to your pay instead of remitting it to the ATO as they usually would.
Effectively you end up with more in your pay packet, but the ‘extra’ $138.75 must be directed into the account from which your property investment expenses are paid.
Your accountant is best equipped to submit an Income Tax Withholding Variation. The ATO imposes strict tolerances around how far out you can be when estimating what you are entitled to collect. Their limit of a discrepancy is usually no more than 10%, so it’s best to have a professionally prepared estimate lodged on your behalf; otherwise, penalties may apply.
Collecting your rebates pay by pay assists with cash flow and may become more important as your portfolio expands or perhaps as your life circumstances change, for example, an addition to the family.
The example below illustrates the situation where rebates are collected pay by pay and the investor’s contribution is subsidised week by week so that they now only have to find an extra $25pw to hold the property.