If your quarterly tax instalment seems too high (or too low), you can learn why that might be and how to vary it to a more appropriate figure here.
Our PAYG Instalment Variation Calclulator is freely available to help you vary your quarterly tax instalment.
WHAT ARE PAYG TAX INSTALMENTS?
In short, prepayments of your income tax for the current year.
Unlike wages, investment income generally does not have tax withheld when it is paid you to – so this can create a large tax bill at the end of the year. The ATO likes to get this from you quarterly during the year so that come year end, you don’t have a large debt.
CAN I OPT OUT?
Not legally, no.
Many people vary their first tax instalment down to NIL which essentially does the same thing (although you may get future notices), however… you have a legal obligation to vary the instalment to a figure that accurately reflects your circumstances – so varying it to NIL when you know you will have investment income to pay tax on is illegal. The ATO can fine you and charge interest in these circumstances.
Once you lodge a tax return with no investment income (or very little), you will drop below the ATO’s relevant threshold and they will stop sending you instalment notices.
HOW DO I VARY MY INSTALMENT?
This is probably the reason you are here… If you need to vary your instalment, then you need to fill out your activity statement a particular way.
We talk about how the ATO calculate instalments below, and it’s all formula based. To vary your instalment there are two figures you need to provide:
- Estimated tax for the year
- Quarterly instalment
We note that the quarterly instalment figure you enter will only be accepted by the ATO if the estimated tax for the year figure matches an ATO formula – so it’s important to understand the formula – and we go through this formula in the next section.
To make it easy for you, however, we have a calculator that does all the hard work that you can download for free here.
The calculator will work out either:
- The tax payable based on your estimated tax for the year; and/or
- The amount you need to enter as your estimated tax for the year to get the instalment amount you want (i.e. if you want to pay $500, what figure do you need to enter as estimated tax for the year).
HOW DOES THE ATO COME UP WITH ITS FIGURE?
As a general rule, the ATO take the last tax return you lodged, works out your investment income and the tax on that investment income, and asks you to pay a quarter of that each quarter (so that come year-end you have paid the full amount).
This gets complicated when you lodge your tax return after mid-September because that first instalment is based on your tax return from 2 years ago (because you haven’t done last year’s yet). When you do lodge last years tax return, the ATO will recalculate the tax instalment.
If your investment income is higher last year compared to 2 years ago, then you have only 3 (or less) quarters to make up the difference – resulting in unusually high instalments for the last quarter(s).
For example, your 2019 tax return has $4,000 of tax payable on investment income. Quarterly instalments will be $1,000 each. When September 2020 rolls around, if you have not lodged your 2020 tax return yet, you will still be charged $1,000 per quarter.
If you then lodge your 2020 tax return in February with $20,000 of tax on investment income, the ATO will assume that 2021’s tax will be similar and will increase your instalments for the March and June quarters so that you have paid $20,000 in advance (so that your 2021 tax return is fully paid before year-end).
This would result in March and June being $9,000 instalments each. This is calculated as $20,000 total, less the $2,000 already paid in September and December, leaving $18,000 payable over the last 2 quarters. Clearly, $9,000 is “too much” if you consider $9,000 x 4 is way more than $20,000 – but remember the ATO is aiming for $20,000 for the full year.
When September 2021 rolls around (the first tax instalment for the 2022 financial year), it will revert down to $5,000 per quarter (again, so the total per year is $20,000).
CAN YOU HELP?
Of course we can. Once you have had a look at our calculator, simply give us a call or send us an email and we can help you vary your instalment.