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  • How to vary your PAYG instalments

    You can vary your pay as you go (PAYG) instalments if they are too high or low.

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    Should you vary

    Pay as you go (PAYG) instalments are prepayments of your expected income tax for the year. If your total PAYG instalments will be more, or less, than your expected tax for the year, you can change the amount you pay.

    If your financial situation has changed, your expected tax may also change. This means your current PAYG instalments may add up to more, or less, than your tax at the end of the year.

    You can vary your instalments so the amount you prepay is closer to your expected tax for the year.

    You do not have to vary your PAYG instalments at all. It will not change how much income tax you pay for the year. After you lodge your tax return, if your instalments were:

    • too high, the excess is refunded to you
    • too low, you pay the shortfall.

    If you pay PAYG instalments using the instalment amount (option 1 on your activity statement), you may want to vary if there has been a significant change in your instalment income this year. See example of varying the instalment amount.

    If you calculate your PAYG instalments using the instalment rate (option 2 on your activity statement):

    • you do not need to vary simply because your income has changed – the payment you calculate will go up and down in line with your income
    • you would usually only vary if the taxable proportion of your income has changed – for example, if your income has fallen significantly but your deductions for running costs have stayed the same.

    You may want to get advice from a tax agent on whether you should vary your instalments.

    What happens if you underestimate

    When you vary your PAYG instalments, it is important to not underestimate your instalment amount or rate.

    If you underestimate, you could be left with a substantial tax bill when you lodge your tax return at the end of the year.

    Also, when we receive your tax return, we compare your actual instalments to the total tax payable on your instalment income for the income year.

    If your varied instalments are less than 85% of your total tax payable, you may have to pay a general interest charge on the difference, in addition to paying the shortfall. Depending on the circumstances there may also be penalties.

    If you are not sure, it is best to not vary your instalments. Any overpaid instalments will be refunded to you after you lodge your tax return.

    Varying your instalments due to floods or other disasters

    You may need to vary your PAYG instalments due to the impact of the 2022 floods or other disasters.

    We will not apply penalties or charge interest on variations if you have taken reasonable care to estimate your end of year tax liability. This means making a reasonable and genuine attempt to determine your liability. When considering if a genuine attempt has been made, we consider what a reasonable person would have done in your circumstances.

    If you are unable to pay your instalment amount you should still lodge your instalment notice and discuss a payment arrangement with us.

    When to vary your PAYG instalments

    You make your variation when you lodge your activity statement or instalment notice. You must lodge:

    • on or before the day your PAYG instalment is due
    • before you lodge your tax return for the year.

    Your varied amount or rate will apply for the remaining instalments for the income year, or until you make another variation.

    How to vary your PAYG instalment amount (option 1)

    You vary your PAYG instalment amount on your activity statement or instalment notice.

    Use the following steps to calculate your varied instalment amount.

    1. Check that you use the instalment amount option

    Check that there is an instalment amount at T7 on your activity statement or instalment notice.

    If there is not, you need to vary your instalment rate (option 2) instead.

    If you varied your instalment amount in a previous quarter of the income year, the amount shown at T7 will be your previously varied amount.

    2. Estimate your instalment income for the year

    Your instalment income is your gross business and investment income, excluding GST.

    3. Estimate the tax on your instalment income for the year

    You need to estimate the tax on your instalment income for the full income year. This is the amount you will prepay in your instalments.

    PAYG instalments calculator

    You can use the calculator to:

    • estimate your tax for the year
    • work out your varied instalment amount
    • work out your entitlement to credits for previous PAYG instalments.

    If you prefer, you can manually estimate the tax on your instalment income.

    If your estimated instalment income (step 2) is zero, you can vary your instalment amount to zero. You do not need to calculate your estimated tax.

    4. Work out how much to pay for each instalment

    The amount you pay depends on how much you have paid in previous instalments this year. After each instalment you should have paid a certain proportion of your total estimated tax.

    Work out how much to pay in each instalment for:

    If you have already paid more than your total estimated tax for the year, you can claim a credit for the overpayment. You do not have to claim a credit. When you lodge your tax return, your PAYG instalments are credited against your income tax and any excess is refunded.

    If you pay quarterly instalments

    You can use the PAYG instalments calculator to work out your quarterly instalment amounts.

    Or you can manually work out your quarterly instalment amounts as follows with the:

    • first quarter
      • 25% of your estimated tax for the income year
    • second quarter
      • 50% of your estimated tax for the income year
      • minus the amount of your first quarter instalment
    • third quarter
      • 75% of your estimated tax for the income year
      • minus the amount of your first and second quarter instalments
      • plus any PAYG instalment credits you claimed for the second quarter
    • fourth quarter
      • 100% of your estimated tax for the income year
      • minus the amount of your first, second and third quarter instalments
      • plus any PAYG instalment credits you claimed for the second and third quarters.

    If you start paying instalments in the second, third or fourth quarters

    If you are new to PAYG instalments this year, you calculate your varied instalment amount as though the first quarter for which you pay instalments is the first quarter of the year.

    For example, if you start paying instalments in the second quarter, you would treat this as your first quarter and pay 25% of your estimated tax in that quarter.

    As you will not pay all 4 quarterly instalments in your first year, at the end of the year your total instalments will be less than 100% of your estimated tax.

    Example: varying the instalment amount

    Cari receives income from her investments. Her quarterly PAYG instalment amount is $5,000.

    Cari pays this amount in her first quarter (1 July to 30 September) and second quarter (1 October to 31 December).

    In January, Cari sells a portion of her investments and decides to vary her PAYG instalment amount on her third quarterly activity statement (1 January – 31 March) to take account of her new situation.

    Cari uses the PAYG instalment calculator and estimates the tax on her instalment income for the financial year will be $14,000. Cari works out her varied PAYG instalment as follows:

    • Estimated tax:
      $14,000
    • Multiplied by 75% (how much to pay for the third quarter):
      $14,000 × 75% = $10,500
    • Minus amounts paid for the first and second quarters:
      $10,500 − ($5,000 + $5,000) = $500

    The varied amount Cari needs to pay in the third quarter is $500.

    In the fourth quarter Cari will pay her total estimated tax minus the amounts paid in the first 3 quarters:

    • $14,000 − ($5,000 + $5,000 + $500) = $3,500

    In the second half of the year, Cari's investment income increases. After she lodges her tax return at the end of the year, her notice of assessment shows her income tax is $15,500.

    As Cari has paid $14,000 in PAYG instalments, she will pay the income tax shortfall of $1,500 (income tax of $15,500 − $14,000 instalments already paid.)

    Cari's varied instalments were more than 85% of her actual tax liability, so the ATO does not charge any interest on the shortfall.

    End of example

    If you pay 2 instalments per year

    Your instalments are due in April and July. You pay:

    • April
      • 75% of your estimated tax for the income year
    • July
      • 100% of your estimated tax for the income year
      • minus the amount of the instalment you paid in April.

    5. Complete your activity statement or instalment notice

    On your activity statement or instalment notice, enter:

    • your estimated tax for the year (from step 3) at T8 – if this is nil, enter 0
    • your varied instalment amount for the period (from step 4) at T9. – if the amount is nil or negative, enter 0
    • the reason you have varied your instalment at T4
    • your varied instalment amount at 5A – if you are filling in a paper form, enter the amount from T9.

    If the varied instalment amount that you worked out at step 4 is negative, you can claim a credit for your earlier PAYG instalments.

    To claim a credit, enter your varied instalment amount at 5B (credit from PAYG income tax instalment variation). Enter the amount as a positive number (do not show the minus sign).

    You do not have to claim a credit. When you lodge your tax return, your PAYG instalments are credited against your income tax and any excess is refunded.

    6. Lodge and pay

    Lodge and pay by the due date on your activity statement or instalment notice.

    How to vary your PAYG instalment rate (option 2)

    You vary your PAYG instalment rate on your activity statement.

    Use the following steps to calculate your new varied rate.

    1. Check that you use the instalment rate option

    Check that there is an instalment rate at T2 on your activity statement or instalment notice.

    If there is not, you need to vary your instalment amount (option 1) instead.

    If you varied your instalment rate in a previous quarter of the income year, the amount shown at T2 will be your previously varied amount.

    2. Estimate your instalment income for the year

    Your instalment income is your gross business and investment income, excluding GST.

    3. Estimate the tax on your instalment income for the year

    PAYG instalments calculator

    The calculator will help you:

    • estimate your tax for the year
    • work out your varied instalment rate
    • work out your entitlement to credits for previous PAYG instalments.

    If you prefer, you can manually estimate the tax on your instalment income.

    If your estimated instalment income (step 2) is zero, you can also vary your instalment rate to zero. You do not need to calculate your estimated tax.

    4. Work out your varied instalment rate

    Your varied instalment rate is:

    • your estimated tax ÷ your estimated instalment income × 100.

    Example: varying instalment rate

    Harmander is a sole trader.

    • We have calculated his instalment rate as 16.84%, based on the information in his latest tax return.
    • He uses this instalment rate in the first quarter (1 July to 30 September) and second quarter (1 October to 31 December) to work out his instalment payments.

    Harmander decides to vary his instalment rate for the third quarter (1 January to 31 March) because increased competition has reduced the profit margin on his sales.

    He uses the PAYG instalment calculator to estimate:

    • his instalment income for the year, which will be $82,480
    • his tax for the year, which will be $10,125.

    Harmander works out his varied instalment rate as follows:

    ($10,125 ÷ $82,480) × 100 = 12.27%

    End of example

    5. Work out credits from previous instalments in the current income year

    If your varied instalment rate is less than the rate you used for earlier quarters in the current income year, you may be entitled to a credit for PAYG instalments paid so far.

    You can calculate your credit using the:

    You do not have to claim your credit. When you lodge your tax return, your PAYG instalments are credited against your income tax and any excess is refunded.

    You need to complete your activity statement as usual even if you are due a credit.

    6. Complete your activity statement

    On your activity statement or instalment notice, enter:

    • your quarterly instalment income at T1
    • your varied instalment rate at T3.

    Multiply T1 by T3 and enter:

    • your instalment amount at T11 and 5A
    • the reason you have varied your instalment at T4.
    • any credits you wish to claim for previous instalments at 5B.

    7. Lodge and pay

    Lodge and pay by the due date on your activity statement or instalment notice.

    Variation reason codes

    When you vary a PAYG instalment on an activity statement or instalment notice, you must enter a reason code at T4 on your activity statement.

    Use the reason code that best matches your situation.

    21 – Change in investments

    Your investment strategy or policy has changed and this will significantly affect your annual tax liability. For example, you sold shares.

    22 – Current business structure not continuing

    Your current business has stopped trading or has changed its structure. For example, you have permanently closed your business.

    23 – Significant change in trading conditions

    Abnormal transactions relating to your business income or expenses will significantly affect your annual tax liability. For example, you have bought a major piece of machinery.

    24 – Internal business restructure

    You have restructured your business. For example, it has expanded or contracted and this will significantly affect your annual tax liability.

    25 – Change in legislation or product mix

    A change in legislation or the product mix of your business will significantly change your annual tax liability.

    26 – Financial market changes

    Your business has been affected by domestic or foreign financial market changes. This reason code is for businesses involved in financial market trading, including those whose income is affected by changes in financial products. These include banks, and finance and insurance businesses.

    27 – Use of income tax losses

    You will be using income tax losses, including capital losses transferred from another entity, that will significantly affect your annual tax liability.

    33 – Consolidations

    You are a head company varying your consolidated instalments based on your estimate of expected consolidation outcomes for the year. Use this code on your consolidated activity statement.

    Last modified: 09 Aug 2022QC 16159