Tax Variation

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From: Brendan S


Help Please!

Trying to figure out weather I should lodge a section 15-15 PAYE tax variation form.

Recently acquired 1st IP and have run figures through PIA. Turns out to be cashflow +ve, however the idea of the property was to negative gear.

Does this +ve cash flow mean it is +ve geared or is it just a cashflow positive, neg gearer?
(if that makes sense)

If its cash flow +ve, should I still lodge the variation form and if so should I do it now or wait until the beginning of the new financial year?

so confusing!!!!! (sorry)

Look forward to your opinions

Ta' Brendan.
 
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Reply: 1
From: Duncan M


Would you care to describe the deal? I dont know what figures you've plugged
into PIA.. perhaps you could tell us the purch price, rent, year of
construction, council rates, etc.. Perhaps then we might be able to make a
rough assessment ourselves of its cashflow status..

I didnt lodge a Variation request until 3 yrs after we started investing, it
wasnt until then that I felt I had the knowledge and experience to
accurately predict my tax position a year in advance.

Regards,

Duncan.
 
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Reply: 1.1
From: Brendan S


Thanks Duncan

Figures are,

Purchase/construction cost including all costs $220k (land only, $76500)
Rent$280pw
Year of construction 2001
Rates $920pa
Loan $220k @ 6.89% fixed I/O
Conveyancing $483
Stamp Duty $1233

anything I've forgotten?

Ta' Brendan.
 
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RE: Tax Variation - Rubbery Figures..

Reply: 1.1.1
From: Duncan M




Hi Brendan,

Not sure why PIA is telling you this is Cashflow Positive..

My quick rubbery figures are:


Income
~~~~~~~
50weeks * 280 = 14000


Expenses
~~~~~~~~
Interest 15158
Rates 920
Maint 1000
Prop Mgt 1400
Deprec Structure 2500
Deprec FixFitt 1000
Travel 200
Insurance 400
Borrowing Costs 400

Or a total loss (at least in the first couple of years) of around $9000.

Without knowing your financial position, lets assume you're on the top
marginal rate.. that'd be something like a $3k-$4K tax return if you're in
PAYG style employment.


Regards,

Duncan.
 
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Reply: 2
From: Dale Gatherum-Goss


Hi Brendan

I'd have another look at the information that you have keyed into the software and the defaults that you have. As Duncan suggests, I would expect a negative result in your figures.

Bye the way, a variation works well for some people as it gives them a little more cashflow during the year to help pay for the IP loan.

However, I have often found that people waste the extra amount in their lifestyle rather than use the funds wisely. Of course, you may be different.

An alternative approach is to wait until you do your tax returns and then collect a larger tax refund which can instantly be used as a deposit towards another IP.

Just a thought to consider.

A lot of people use the variations simply because a real estate agent told them that they could use one as a marketing tool to help people believe that they can afford to buy.

Of course, there are genuine circumstances, too where the use of a variation is warranted and worthwhile.

Just be careful.

Dale
 
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Reply: 3
From: Kristine .


Duncan

Just a thought, but perhaps it is BECAUSE of your tax deductions that you are calculating some money left over?

In other words, the property is negative cash flow, adjust for tax benefit, bingo, positive cash flow.

In my experience with working through the PIA with people, when properties are fully financed or with only minimal deposit, the transaction is 'negatively geared' before depreciation and other cash or non-cash deductions are taken into account. The final result may be positive cash flow, but do not confuse this with 'positively geared', which is where the property is financially self sufficient regardless of the taxation status of the purchaser and requires no further investment of funds to keep it going.

Just another way of looking at the same figures.

Kristine
 
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Reply: 3.1
From: Brendan S


So just to clarify,

For a property to be positively geared it has to be making money without the help of tax benefits?

So therefore even though I'm showing a positive cash flow it is still deemed negatively geared?

And to my original question, can I still lodge a Tax Variation form? ( yes I do want the extra cash flow to show greater serviceability for more loans and more properties)

Ta'Brendan
 
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Reply: 3.1.1
From: Paul Zagoridis


"Positive cash flow" and "positive geared" mean different things to different people.

Geared simply means you have the leverage of a loan on your investment.

Positive cash flow means money is flowing into your pocket.

Here is your dilemma. To some, paying less tax is equal to more money in your pocket (more on this illusion at the bottom). As a result property marketers are now referring to after tax gains as "positive cash flow"

You are still negatively geared, but you are losing less than someone on a lower tax rate because you can deduct all your losses from your salary (thereby paying less tax overall).

Ask yourself this... If you lost your job, how long could you afford the property? If the property puts money in your pocket regardless of your other income, you have positive cash flow. (i.e. it feeds you).

Back to the tax illusion.
You lose $100 and the government lets you reduce your taxable income by that $100.

Assume your taxable income is $6,100 p.a. tax is 17% (+1.5% medicare levy) of $100 above the tax free threshold = $18.50 and take home is $6,081.50

After that loss you now only earn a taxable income of $6,000 = Tax free threshold. Tax paid is $0. BUT you are $81.50 worse off for the investment!

You pray the investment has capital gains of at least $81.50 to offset your loss of economic power.

Here is the table for other tax rates assuming $100 loss at
Salary Tax saved Economic Loss
$20,100 $31.50 $68.50
$50,100 $43.50 $56.50
$60,100 $48.50 $51.50

Non-cash deductions like depreciation help because you don't have to reach into your pocket to pay for them (straight away). So the economic loss can appear to be $0.

But depreciation is the normal "wear & tear" on an asset. You car is not worth what it was when new, same as your kitchen and bathroom. So you don't pay for it now, but you do when your upgrade or renovate.

Non-cash deductions are where the illusion of negative geared but positive cash flow is performed. Capital gains are mandatory to make it profitable.

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/
 
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Reply: 3.1.1.1
From: Anony Mouse


Brendan,
Maybe the problem is in the use of the term negative gearing.
The fact is all gearing is positive. The term comes from mechanics.
It has to be positive because the ratio of total assets to your equity is always positive, when other peoples money is used.
The end result of the investment may be positive or negative in terms of net income.
It is net income; gross income less all allowable deductions which need to be looked at.
Also as property is a real asset, which generally has a tendency to capital appreciate if purchased wisely, this also needs to be taken into consideration,especially as capital gains tax comes into play on disposal of the asset.
Each aspect of the equation needs to be studied seperatly to maximise gains.
You probably won't find a better forum for discussions on all the aspects, than this forum.
I've certainly a learned a few things, which have been of use to me.

"A government that robs Peter to pay Paul can always count on the support of Paul."
Of course, Paul's support is obvious, but it is equally obvious that to rob from Peter to pay Paul will make Peter
very, very angry.
My question is this: "How can you run a good government with a sore Peter?"
 
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