Should you vary your PAYG Instalments?
Pay As You Go (PAYG) Instalments are prepayments of your income tax for the year. If your total PAYG Instalments will be more or less than your expected income tax for the year, you can change the amount you pay. If your financial condition has changed, your expected income tax may also change, which 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 income tax for the year.
You don’t need to vary your PAYG instalments at all. It will not change how much tax you lodge and pay for the year. After lodging your tax return, if your instalments were:
- Too high, the excess will be refunded to you
- Too low, you pay the shortfall.
If you pay PAYG instalments using the instalment amount, you may wish 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:
- You don’t have to vary because your income has changed – the payment you calculate will be high or low with your income.
- You would only vary if the taxable proportion of your income has changed – for instance, if your income has decreased significantly but your deductions for running expenses have remained the same.
You may want to get suggestions from a tax accountant Melbourne on whether you should vary your instalments.
What if you underestimate?
When you vary your PAYG instalments, it’s crucial not to underestimate your instalment amount or rate. If you underestimate, you may be left with a substantial tax bill when you file your tax return at the end of the year. Also, when the ATO receives your tax return, they will make a comparison between your actual instalments and the total tax payable on your instalment income for the income year.
If you reduce your PAYG instalments too much, and they are less than 85% of the total tax you owe, then:
- You’ll still have to pay the rest of the tax amount (the shortfall).
- On top of that, you may be charged interest (known as a general interest charge) on the unpaid amount.
- In some cases, you may also face extra penalties.
Varying PAYG Instalments after floods or disasters
If your financial circumstances or income have been affected by floods or other disasters, you can vary your PAYG instalments to better show what you expect to earn. As long as you make a reasonable and genuine effort to estimate your total tax for the year, you won’t be charged interest or penalties, even if your estimate is not completely accurate. A reasonable effort simply means doing your best with the information available – similar to what an average person would do in the same situation. If you are not able to pay your instalment, you still need to file your instalment notice on time. After that, you can contact the tax office to arrange a payment plan.
If you have a study loan
If you have a study or training support loan, the PAYG instalments calculator is not yet updated to show recent changes that reduce how much you need to repay. Because of this, if you use the calculator to vary your instalments, it may overestimate your tax, meaning it could advise you to pay more than you actually need to for the 2025-26 income year. Instead of depending on the calculator, it may be better to work out your estimated tax manually for now. The calculator is expected to be updated from 1 July 2026, and after that, it will give more accurate results depending on the new repayment rules.
When can you vary your PAYG Instalments?
You can vary your PAYG instalments at the time you lodge your activity statement or instalment notice. However, there are deadlines. You need to make the change on or before the due date for that instalment, and you must do it before you file your tax return for that income year. After making the change, the new amount or rate will apply to all remaining instalments for the rest of the year, unless you decide to vary it again later.
Conclusion
To know how and when to vary your PAYG instalments, you can reach out to Reliable Melbourne Accountant for comprehensive accounting services.