The ATO asks for PAYG Instalments when a business makes a profit or gets investment income in the previous year, or when individuals get investment income. The ATO estimates what the likely profit or investment income will be based on that previous year (so long as it is over a threshold), and asks you to prepay a fraction of that estimate every quarter. That quarterly payment is your PAYG Instalment.
You can vary PAYG instalments if you know the coming year’s profit or investment income is going to be different.
The reason this is important is simple: your cashflow.
If the ATO estimate is wrong, because business conditions have changed, or because your profit or investment income was one-off, you shouldn’t pay tax in advance if you don’t have to.
Less common but also useful is to increase your PAYG Instalment if you are going to receive more profit or investment income than anticipated. Paying by instalment can help your end-of-year cash management.
In the end you will always pay the same amount of tax – if you overpay instalments, the excess is refunded, if you underpay, you make up the difference. Varying your instalment just changes what gets paid when.
But beware. It is hard to get variations right, and there are consequences for getting them wrong. Many clients get it wrong.
If you vary and underestimate by too far
Be aware that if you reduce your instalments and your payments are well below the actual amount (less than 85%), you may have to pay a general interest charge on top of the extra tax. If you are way off, you may get a fine as well. It pays to get the instalment amount right.
When you get a PAYG Instalment Notice
If the ATO sends you a PAYG Instalment notice, and you don’t understand it, or you don’t agree with the amount, contact us straightaway. It is important to sort things out well before the Notice is due for payment.
Get help to get any variation right
Because of PAYG Instalment effects on cashflow, and the negative consequences of getting variations too wrong, we advise you to contact us about variations before you do anything. We can help get the calculation right.