Noel Whittaker's Blog Recently, during a talkback radio program, a listener aged 50 who owns a negatively geared investment property, asked me if they should sign a PAYG variation form to enable the tax savings that would be generated by the investment losses to reduce the tax on their fortnightly salary. The tax savings, in this case, amounted to around $7500 a year or $290 a fortnight.
Without hesitation, I responded that it would be a bad idea. The question really becomes “should I sign a form that will put an extra $290 a fortnight into my pay, or get by with what I am receiving now, and look forward to a tax refund cheque of $7500 at the end of the financial year.” It’s a no-brainer surely.
The listener was persistent. The next question was whether he should still do the tax variation, but use the extra $290 a fortnight to reduce the investment loan. It turned out the interest rate on the loan was 3.5% per annum, and the investor was in the 39% tax bracket. This means the effective tax rate after-tax was just 2.13%. This is what they would earn by using the surplus money to reduce the loan.
A better solution would be to take that $7500 and make a deductible contribution to superannuation – preferably before 30 June, if they had the money available. That would generate a further tax refund of $2,925 making total tax savings $10,425 a year. In the following year they could repeat the process, but this time the tax-deductible contribution could be $10,425 giving rise to a total tax refund $4066. If they kept up that strategy till age 65 it could put an extra $300,000 into their superannuation. Hopefully, that could pay most of the investment loan.
For many years I have been passionate about squirrelling money out of our pay packet and then investing it on a regular basis so compound can work its magic. A PAYG variation to increase the pay packet, at the expense of the lump sum is exactly the opposite.