Withholding variations

Payee circumstances

Each payee's circumstances are different, and some payees may find that the amount withheld using the tax tables is either too much or too little when compared to their actual end-of-year tax liability.

Your payee may want to vary the rate of withholding so that they don't:

• have too much tax withheld
• receive a large tax bill at the end of the year.

Upward variation

A payee may ask you to increase the amount you withhold from payments to them – for example, to cover tax they will be liable to pay on investment income.

If you agree to this, both you and your payee will enter into a written agreement (in any form that suits your business) to have additional tax withheld. No additional records are required.

Where your payee has an upward variation in place and it applies to payments that become non-assessable, the variation ceases to have effect.

For more information, see Schedule 14 – Tax table for additional amounts to withhold as a result of an agreement to increase withholding.

Downward variation

Your payee must get our approval to reduce the amount you would normally withhold by completing a PAYG Withholding variation application.

This usually happens only in special circumstances where your employee can show that the withholding rate will result in them having more tax withheld than is required to cover the total tax they will need to pay in the year. For example, they might expect to have tax deductible expenses which will reduce their taxable income

You can't vary the withholding rate until you receive an official variation notice from us.

A variation notice can only be withdrawn by us. If your payee wants their variation notice withdrawn before the expiry date, tell them to write to us at the address on their approval letter.

How to lodge a downward variation

To lodge online for individuals, sign in to myGovExternal Link and select:

1. ATO
2. Tax
3. Manage
4. PAYG withholding variation

To lodge online for tax agents, go to Online services for agents and select:

1. Lodgments
2. Client forms
3. PAYG withholding variation.

If you can't lodge online, you will need to order a paper application by either:

• visiting online ordering and searching for NAT 2036 (or NAT 2036NI if you're a Norfolk Island resident)
• phoning our automated self-help ordering service on 13 28 65 and asking for the NAT number you need.

Starting and finishing dates

If we approve a downwards variation, the varied rate or amount of withholding will start from the next available payday after you receive the notice of withholding variation from us.

The variation finishes on the date shown on the letter you receive from us. To continue to have varied or reduced tax withheld from payments after this date, another variation application must be lodged at least 6 weeks before the expiry date.

If you receive more than one variation notice for an employee, the most recent notice supersedes all previous notices. Keep a copy of the variation notice with your business records for 5 years. For more information, see PAYG withholding – varying your PAYG withholding

Note: Salary sacrifice amounts are not subject to the varied tax rate.

Class variations

If a group of your payees want an identical variation, you can apply for a class variation on their behalf. For example, your payees' withholding may be too high if they are paid an allowance and it is reasonably expected that their expenses in relation to that allowance will be deductible in their tax returns.

You may apply for a class variation if all of the following apply:

• the allowance can reasonably be expected to be spent for the intended purpose
• the payees can reasonably be expected to spend an amount at least equal to the amount of allowance paid
• the expenses relating to the allowance can reasonably be expected to be deductible on assessment at the end of the financial year
• it is for 6 or more employees.

You need to ensure that the information you give us is correct on behalf of all the payees included in the request.

If there are fewer than 6 payees, each payee must apply for the variation on their own behalf using the PAYG withholding variation short application (NAT 5425).

How to lodge a class variation

You can submit the request for a class variation by letter, displayed on your company letterhead.

You must include the following information:

• the nature or type of business undertaken by the organisation
• the type of allowance payment being made and the expense the payment is intended to cover
• the amount of allowance to be paid to each payee
• a declaration stating the proportion of the allowance that is expended as business use
• list of payee names and tax file numbers
• basis of employment or contract for each of the payees
• duties of the payees
• the number of payees the application intends to cover.

Send the letter to:

Australian Taxation Office
PO Box 3010
PENRITH NSW 2740

What to do when you receive a variation notice

If you receive a notice from us, you need to ensure the notice is correctly addressed to you and correctly identifies the payee.

You may receive one of the following and will need to act accordingly:

• Notice approving the downward variation
  • from the payee's next available payday after you receive the notice of withholding variation from us , apply the varied or reduced rate of tax to the correct payment type until the expiry date.
• Withdrawal notice
  • stop applying the varied rate of tax from the payee's next available payday after you receive the withdrawal notice from us and revert to withholding in accordance with the relevant tax tables.

Medicare adjustments

If your employee advises you that they are liable for Medicare levy surcharge or entitled to a reduction in or exemption from the Medicare levy, they will need to complete the Medicare levy variation declaration. You will then need to adjust the amount you withhold from payments to the employee to take into account this change.

Increased number of pay periods in a year

In some financial years, payees who are paid:

• fortnightly will have 27 paydays for the year instead of the usual 26
• weekly will have 53 paydays for the year instead of the usual 52.

As the calculations for withholding tax are based on the normal number of pays in a year, the extra pay may result in insufficient amounts being withheld. You should let your payees know when this happens so they can ask you to withhold an additional amount. Such a request should be in writing, in any format that suits your business.

If any of your payees want to further increase the amounts withheld, they will need to request an upward variation.

Details of the additional amounts to withhold are included in the tax tables.

For more information, see:

• Schedule 1 – Statement of formulas for calculating amounts to be withheld
• Tax withheld calculator