What is an Income Tax Withholding Variation?
For salary and wage earners, their employer is required by law to deduct or “withhold” income tax from their regular pay packet. The amount withheld is based on a number of factors, with the key ones being your salary / wage and the standard tax rates in place at that time. The employer cannot vary the amount of tax withheld unless they have an approved Income Tax Withholding Variation (ITWV) from the ATO. So an ITWV authorises your employer to deduct or withhold a lesser amount of income tax than they normally would.
The benefit is…
Let’s say that in a financial tax year you are earning $100,000. Your salary is paid monthly and you have a negative gearing tax loss of $15,000 from your investment property. In both scenarios, you save $5,891 over the year in tax. The major benefit of the ITWV – and why, in our opinion, you should always have one – is that you get this cash benefit much earlier. Wouldn’t you rather have the money in your pocket than leave it with the ATO? Remember you will not get any interest on this money leaving it with the ATO!
What could you do with the extra $490 you receive per month?
Each month you could use part of this $490 to pay for some of the interest of the investment property loan, or put it towards other running costs. In other words, you can let the ATO help pay for the monthly costs of your negatively geared investment property.
You could park this $490 per month in your offset account against your home loan, saving you non-deductible interest costs and helping you pay down your own home loan quicker.
You could forgo these benefits and wait for your tax refund at the end of the year. However, many people who get a big tax refund in a lump sum tend to blow it on consumables like a holiday, rather than use it to reduce their home loan or to grow their wealth.
Frequently Asked Questions
Why do I need a new ITWV every year?
The ATO only issues an ITWV for the one financial year. You therefore need to reapply every financial year.
Can I just tell my employer I am negatively gearing an investment property and get them to reduce my tax?
No. Your employer must have a letter from the ATO in order to apply the reduced tax rate.
Why is my ITWV expressed as a percentage?
This is because it is easier for your employer to simply multiply any wage they pay you by the given percentage to work out how much tax to withhold. Telling your employer what amount to deduct from your gross wages gets too complicated for them to work out your tax if your wage fluctuates.
What if I only own 1% of the property and am on a small wage?
Generally, we find that the benefit here is small and it is usually not worth the cost of having an ITWV done.
What if I change jobs; do I need a new ITWV?
Yes, as the ITWV is specific to the named employer.
What if I get a pay rise; do I need a new ITWV?
The answer varies. If a small rise, potentially, no; if a larger rise, then yes. To remove any doubts please call us to discuss.
What if I sell my investment property?
Your ITVW should be amended or cancelled. Please speak to our office, as we will need to write to the ATO on your behalf.
What if the costs of my investment property change significantly?
As an example, if your interest costs drop by $5,000 per annum, then you may have a smaller tax loss; so you should consider varying your ITWV. There are penalties if you significantly overstate your investment property loss in the ITWV and therefore pay too little tax during the year.
If you have any other questions regarding the above, or want to speak to us about lodging an ITWV for you, please contact McCarthy Accountants.
Tax Practitioners Board Rego No 25253126
1300 850 318
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