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.

Kind regards

Ross Barnett

 
 
 
 

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