Reduced tax when being paid by employer vs getting a large tax refund

I know that there is a form that can be submitted to the ATO (can't remember what it is called, offhand) that can be used to reduce the tax taken out of your regular pay. This is based on what you are likely to earn etc for the financial year, and is based on previous tax returns.

Does anyone use this, or do they just pay the tax calculated by their employer (based on their PAYG income), then claim all the deductions after 30 June, and get the 'big refund'?

What are the pros and cons to both systems? I would love to hear which option people go with, and why.

 

Yes a lot of people with negatively geared properties use this. It gives you more money each week (as you mentioned). instead of getting a tax refund.
I guess it depends on yourself. If you need/want the money for other things. I think why not get it earlier?
Other people (maybe those that cannot control their spending) want a bigger tax return.
When I bought my first property I filled in the tax variation form as I had a negatively geared property. Then I woke up to myself and bought CF neutral to CF+ stuff only.

 

yes have a few clients who do it.

as @Travelbug says it gives you increased cashflow weekly and hopefully that is put to paying off any non deductible debt first.

the problem with many people is they spend the extra cash. a large tax refund at the end of the year can then be better in that respect.

it depends how disciplined you are.

 

Its called PAYG variation......PAYG withholding e-variation

I rather have money with me and saving me interest using offset than Govt earning interest on that...

 

I did it and find I owe. Doh! But better in my hands than the government's.

 

PAYG Variation
- Needs to be accurate or shortfalls occur
- May need to be reviewed and redone if matters change
- Errors can result in penalties
- Are you setting the extra pay each pay period ?
- Helps those with tight cashflow servicing issues but lenders wont consider it
- Cost ? As a tax agent I do charge extra for it
- You can make a partial claim. eg Half the benefit
- As a crude rule of thumb take the full year neg gearing loss and divide by 3. Then take that amount and divide by number of remaining pay periods to give likely tax benefit per pay.
- Negative is you must repeat annually (June ?)
- Can be very effective to bring fwd NRAS tax credits and also large non-cashflow gearing such as substantial depreciation deductions . I have client with $15K per property refunds and more than one of them. He/she is quite wealth and varies to 0% each year. Then gets a large refund at year end for the balance due.

No Variation
- One single lump sum you can plan around
- No extra cost
- No risk of error

 

Thanks @Paul@PFI - I'm thinking that I'll just wait until after June 30 for my annual 'bonus'.

 

G'day Paul- was scrolling through this thread amongst other in trying to decide whether i should complete a PAYG variation.

Why wont lenders consider this in calculating serviceability?
My last loan the bank only looked at pay slips rather than my tax return- did I just get lucky?

 

We always found we could do more with a lump sum each year that the extra weekly dollars. I know we were giving an interest free loan to the ato but it worked for us.
Marg

 

I am the absolute opposite.

I have always believed that I can make better use of my money (and it is MY money) than any Government .

 

I deal several clients a year who say the same and it depends on how you ""use" your enhanced cashflow. A few have self assessed their PAYG Variation as they chose not to have it done for a fee with review for errors and now have a large tax debt. One actually allowed his (bank) mortgage broker to lodge it for him (!!) - Who I referred to the Tax Practitioners Board.They got it wrong. In one case the debt has now prevented a new loan as the lender wants it cleared first. And so does the ATO who are charging 8.72% daily

Many clients prefer not to do a PAYG variation and love the annual lump sum. One I think of plans an annual holiday to an exotic location and another that comes to mind specifically repays their home debt.

Personal choice but take care with getting it wrong

 

It doesn't help with bank servicing because the amount of tax you pay doesn't change, only the timing of the return you get. You don't actually get more money.

 

Jess - 5 gold star explanation.

 

I prefer the one lump sum and it generally lines up with my annual work bonus - so I go from maintaining my buffer for 11 months of the year to BOOM in September.

 

Is that only true if they look at your actual annual tax return and assess you on your income after your deductions?

vs

if they assess you just of pay slips and they assess you on your expected annual salary and not taking into account your deductions (no PAYG variation submitted)?

 

The actual amount of tax you pay will be the same - it's basically just getting your deduction in 52/26/12 lots instead of a lump sum at the end of the year.

The variation doesn't change your taxable income.

 

But wont the banks perception of how much tax you pay per year (and hence the ability to service a loan) differ in those two scenario's i.e. do all lenders base serviceability on gross income (annual salary) OR expected net income (based on pay slips) OR actual net income (annual tax return)?

 

No. Banks normally assume tax withheld to be merely sufficient. They sometimes ask for proof there is no debt after tax is lodged. For example is the notice of assessment shows a debt due to the ATO. They can get concerned if there is no tax withheld that a tax debt may follow but thats typical of self employed etc. And why they can get funny about self employed v's normal workers.

Banks often also ask about HELP debts which are often evident when the assessment shows a HELP debt repayment.

Also a tax return doesnt show spending and lifestyle expenses and debt repaymnets which the lender will also assess.

 

So if your tax withheld each fortnight is altered through a PAYG variation- tf wouldnt that alter the serviceability?

Or do all banks need to see your notice of assessment?

Cheers

 

It can come into it occasionally with some lenders, but most go off gross, not net, on the whole.

From a broker perspective, I assess off the gross figure unless there's tax-free income - then I use gross income and gross up the tax-free, assuming the lender allows it. You don't tend to run into trouble then.

Banks can and do notice if there's not enough (or too much) tax being taken out.