What is a Big Tax Refund?
21 September 2018
WHAT IS A BIG TAX REFUND?
If we take away chattels depreciation, a tax refund means you are losing money. For example, if you are getting a $10,000 tax refund, in approximate terms it means you are losing $30,000. So, overall, you are still $20,000 down after tax.
I often use this example: If you want an extra $10,000 tax refund, then pay me $30,000 extra. Most people think about this for a while, before realising that it is a horrible idea, as you will be giving $30,000 to get back $10,000!
Whereas, if you have to pay $10,000 in tax, it is actually a good thing. It means you are making $30,000, then after paying $10,000 in tax, you still have $20,000 left.
It is important to understand your cash flow, and in my opinion, if you have negative rentals, you should have a 5 year plan to turn the loss into a profit, or at least break even. Especially with Ring Fencing looking like it will come in from 1 April 2019!
This is a rental property that a client looked at buying last week! I start off looking at the rental with 100% mortgage, and this is a very high loss at $9,807 per year. So when Ring Fencing comes in, that will be a $188 per week cash loss! This is a brand new property, so that is why repairs are so low, but I would often allow $2,000-$3,000 per year depending on the property. My numbers are in the spreadsheet below. This example shows a $5,216 tax refund under current rules which looks great but the investor would still be losing $4,591 after tax.
Hopefully you found this interesting.