You can vary your instalments so the amount you prepay is closer to your expected tax for the year.
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.
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 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; and
- 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.
Underestimating instalment amount or rate
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 your tax return is lodged, the ATO compares 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 interest (the 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.
The ATO has said that it 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, the ATO considers what a reasonable person would have done in your circumstances.
Want to find out more?
Talk to us about whether you should vary your PAYG instalments. We can also talk to the ATO on your behalf if you are unable to pay an instalment amount.