If you pay PAYG instalments, there is a good chance the amount comes straight from last year's tax return. A report published by Accountants Daily this week quotes a Perth area accountant who says many small business owners pay it without question, and that a quick review can free up real cash.

The idea

PAYG instalments are prepayments of your income tax. The amount is usually based on a past year, so if this year looks weaker, you may be paying more than you need to. According to the Accountants Daily article, any overpayment sits with the ATO until your return is processed, which can be 12 to 15 months. The accountant quoted says he has seen clients free up between $10,000 and $15,000 a quarter. That is one practitioner's experience, not an ATO figure, and it is a cash flow timing benefit rather than a tax saving.

The rules to respect

Based on ATO guidance:

  • You can vary your instalments on your activity statement or instalment notice, and you must enter a reason code at T4 that best fits your situation.
  • If your varied instalments end up less than 85% of your actual tax for the year, you may have to pay the general interest charge (GIC) on the shortfall. GIC is not tax deductible.
  • The ATO says it will not apply penalties or interest on variations where you took reasonable care to estimate your end of year tax.
  • For business clients, the ATO may consider full or partial remission of GIC, depending on the circumstances.

What to do

  • Check each quarter. Compare year to date profit with what the instalment assumes.
  • Use real numbers. Base any variation on up to date accounts, not a hunch, and keep your working.
  • Do not vary to nil to ease the squeeze. The unpaid tax does not go away, and a big bill at the end can hurt more.
  • Vary upwards too. If profit is rising, paying more along the way avoids a nasty surprise.
  • Talk to your accountant first, especially if you run several entities.

With the ATO also leaning harder on tax debts, getting your instalments right is a sensible bit of cash flow housekeeping.

This article is general information only and does not take your circumstances into account. Check the ATO website or speak to a registered tax professional about your situation.