Varying Pay As You Go (PAYG) Instalments

The issue of varying PAYG Instalments has been relevant of late as many clients are looking to reduce the amount of tax they need to pay to the ATO at a time when business and investment profits may be lower than in previous years. Accordingly I have provided some brief comments regarding the process and the implications of doing so ...

What are PAYG Instalments?

Well, if you don’t know, you are most likely lucky enough to not have to deal with them, but for future reference ...

Taxpayers (including both individuals and companies) can be asked to prepay their income tax where their earnings contain income that is not otherwise taxed at source. So if most of your earnings come from Salaries and/or Wages, you generally won’t be asked to pay PAYG Instalments because tax is already being taken out before you receive it. However if most of your earnings are from business or investing activities (including distributions from a family trust) then no tax is withheld from these amounts throughout the year, hence the ATO ask you to pay PAYG Instalments so that you are making regular payments of tax and don’t find yourself with a huge bill at the end of the year.

Can you vary the amounts you are asked to pay?

There are a few different ways the amount you are asked to pay can be calculated, but regardless of the method applicable to you, there is scope within the law for you to vary the amount as you see fit at the time. However, the idea of the ability to vary is to allow you to make an estimate of your actual obligation and is not meant to allow you to postpone payment of your taxes.

What happens if I vary the amount and it is too low?

If you vary your PAYG Instalments down, and upon completion of your tax return for the year you have additional tax to pay (ie. the instalments you decided to pay were less than those requested to be paid by the ATO and less than your final tax obligation for the year) then you can be charged interest, referred to as the “General Interest Charge” on the shortfall. The interest is calculated dating back to the time your instalments were due. This can often be well over 12 months before the time your final tax position is determined. At present the General Interest Charge rate is 10.13%!

The ATO will apply the General Interest Charge if:

  • you vary your PAYG Instalment downwards and your varied instalment amount is based on an estimate that is less than 85% of the actual tax payable on your business and investment income, and
  • your varied rate is less than 85% of the instalment rate that you should have applied, or you vary your instalment amount to zero but have business and investment income for the year and tax payable on this income.

Where the General Interest Charge is applied, you may be able to ask for remission of the charge. You must ask us in writing and outline the circumstances that led you to delay payment. The ATO will consider:

  • your extenuating and unforeseen circumstances, and
  • the steps you have taken to relieve the effects of those circumstances.

Conclusion

Clearly there will be times when it is necessary and appropriate to vary PAYG Instalments and we would encourage clients to do so in these circumstances to avoid unnecessary cash flow stress. However, there can be significant costs to doing so unnecessarily or in an overly aggressive way. Where a client wishes to vary an instalment we would encourage them to contact us to discuss their circumstances to ensure we have a case in the event we are required to state it to the ATO at some later date!