Summary
The ATO are cracking down on people who vary their PAYG Instalments to $0 (or another low figure) as a way of deferring their tax until the end of the year. We are starting to see the ATO charge interest on the amounts that should have been paid, which in some cases can end up being a substantial amount given the ATO interest rate is currently above 11%.
Key Links
We highly recommend you look at:
- Our previous Insights article about varying your PAYG Instalment – https://www.mcaaccountants.com.au/resources/insights/how-to-vary-your-payg-tax-instalment/
- Our YouTube video on how to vary your PAYG Instalment from within your ATO Online Services – https://youtu.be/Q4dSN6IxqKY?feature=shared
- Our calculator can be downloaded from https://www.mcaaccountants.com.au/download-files/9529/
WHAT ARE PAYG INSTALMENTS?
As you may be aware, when you earn income that has not had tax withheld from it (i.e. investment or business income), this creates a potential large end of year tax bill. The Government and ATO see large one-off tax debts as high risk, and as such try to get tax on this income in advance – with the goal of having the tax on this income before you do your tax return so there is only a minor payable (or a minor refund).
This is called Pay As You Go Instalments (PAYG Instalments).
The ATO send recipients of business and investment income quarterly PAYG Instalment notices, asking for $x of tax each quarter, representing their estimate of the tax on your current income. The difficulty here is that the ATO does not know your current income, so they have to use your last tax return as the basis for their PAYG Instalments.
Of course, if your income this year is different, then the amount of tax the ATO asks for isn’t right – and in these cases you are allowed to alter the tax payment, which is called a PAYG Instalment Variation.
We note that a PAYG Instalment Variation must be done before the due date, so you should look at this as soon as you get your notification from the ATO that you have one due.
A WORD OF WARNING
Historically, people have just varied their PAYG Instalments to $0, put money aside in a bank account to earn interest, and just paid the whole year’s tax in one go. This was (and is) against the rules, but the ATO never really did anything about it so 24 years into the PAYG Instalment system, it’s seen as an unwritten rule that you can do this.
THIS HAS CHANGED. By Law, when you vary a PAYG Instalment, your varied amount must be within 85% of your actual year end tax. If you vary it and end up paying too little during the year (and have a big bill at the end of the year), the ATO has the right to charge you interest on the amount you didn’t pay each quarter.
For example, last year you earned $20,000 of investment income and paid $6,000 tax. As a result the ATO ask for $1,500 per quarter to cover this year’s tax (on the assumption you will earn $20,000 again this year and have $6,000 of tax due). If you vary the PAYG Instalments down to $1,000 each because you are short of cash at the time, the ATO can charge you interest on the “missing” $500.
We are, for the first time, seeing letters from the ATO where they are targeting this and they are charging interest where your PAYG Instalment Variation is outside that 85% benchmark.
HOW DO I DO A PAYG INSTALMENT VARIATION?
Filling out your PAYG Instalment form is the easy part. Log in to your ATO Online Services / MyGov, head to lodgements and then activity statements, open it up, and head to the section that says variation. You can watch our YouTube video on this at the end of this article.
The tricky part is working out the amounts. When filling out your PAYG Instalment Variation, you have to provide an estimate of your total tax and fill out your desired PAYG Instalment amount for the quarter. You can’t just put any figure in there, it has to match an ATO formula – and they don’t make it easy to understand.
Thankfully, we have a calculator to help you, which you can obtain from https://www.mcaaccountants.com.au/resources/insights/how-to-vary-your-payg-tax-instalment/. It will give you the option of either:
- Working out what you need to enter as “estimated tax for the year”, based on the amount you want to pay this quarter; or
- Working out how much you need to pay this quarter, based on your estimated tax for the year.
Using this will save you a lot of headaches when varying your PAYG Instalment.
CAN YOU DO IT FOR ME?
We absolutely can, we just need to know either:
- How much you want to pay this quarter; or
- What your estimated business and investment income is for the year (and we can work out the estimated tax from that).
If you tell us to “just make it $0” – we can do it, but if it turns out that you have tax to pay at year end, don’t blame us when the ATO send you a bill for interest on the PAYG Instalment you chose not to pay.
Our fees for looking after this for you is $55 per variation.
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