Varying your PAYG instalments is a fairly common practice. It makes sense to lower what you pay to the tax office by half, or even down to zero, if your cash flow is not as good as it once was. Effectively, you can keep varying instalment after instalment so that you rarely pay the full PAYG amount. The Government charges 10-13% interest on the unpaid amount, but realistically this interest has rarely been enforced upon the taxpayer.
Until now.
Do you vary your instalments?
The ATO calculates your PAYG instalment rate based on your previous financial situation and returns. You can vary the rate or amount on your most recently issued activity statement if you feel your financial situation has changed and the rate or amount is too onerous at the present time.
This option to decrease what you pay can be taken up a number of times. Naturally, this leads the ATO to question whether you are failing to pay your tax liabilities, and hence the institution of interest charges on the difference between your PAYG instalment (calculated based on your reported income) and your variation.
Hence a General Interest Charge (GIC) is applied when an amount of tax, charge, levy or penalty is paid late or is unpaid, or when there is an excessive shortfall in an incorrectly varied or estimated income tax instalment. It is calculated on a daily compounding basis on the amount outstanding.
Are you understating your instalments?
If you use the rate method, then your PAYG instalment rate will be based on the presumed accuracy of your instalment income at T1 on your activity statement. This is checked against your lodged tax return.
If you vary this amount so that you pay less, then this may be construed as providing a false or misleading statement about your income. The penalty on the shortfall amount could be 25%, 50%, or 75%.
Are you excessively varying your instalments?
How often and how much you vary your instalments depends on your cash flow. It is left up to the discretion of the taxpayer, though the ATO does provide calculators and support to help in the correct application of a variation. But if you do vary your rate or amount so that the variation is more than 15% under your actual tax payable, then you may be subject to a General Interest Charge.
How can you avoid paying the penalties?
There are a number of factors that can legitimately require you to vary your instalments. Income and cash flow are unpredictable at times. The ATO recognises this, hence there are extenuating circumstances wherein the GIC on a debt may be remitted in part or in full.
- the delay in payment was not due to your actions (for example, you were the victim of natural disasters, industrial action, the unforeseen collapse of a major debtor, or the sudden ill health of key personnel) and you took reasonable action to reduce the delay.
- you took reasonable action to reduce the delay, and it is fair and reasonable to remit.
- payment of the full amount of GIC would result in serious financial hardship for you.
The key is documentation and accuracy. Precise record-keeping can justify to the ATO reasons for lowering your PAYG instalment rates or amounts. Likewise, an accurate understanding of by how much your rate or amount can be lowered will mitigate the potential occurrence of an interest charge.
Your business advisors and tax accountants make this their bread and butter. Contact Calibre’s experts who have built a strong reputation for effective dealings with the ATO to best manage your PAYG.
Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.