Can I vary PAYG instalments I can't afford?

How to vary an instalment

The ATO sets your instalment from your last lodged return, either as a fixed amount or as a rate applied to your instalment income. If your circumstances have changed, you can vary it on the activity statement:

• Instalment amount: estimate your tax for the year, subtract instalments already paid, and spread the rest over the remaining quarters.
• Instalment rate: divide your estimated tax by your estimated instalment income to get a new rate.

The variation must be lodged on or before the instalment due date and before you lodge your tax return for that year. It then applies to the remaining instalments unless you vary again. If your estimated instalment income is zero, you can vary the instalment to zero. Give the ATO a reason code; a genuine drop in income is the normal one.

The 85% rule

The ATO accepts that estimates are imperfect, so it allows a margin. If the total of your varied instalments is at least 85% of the tax actually assessed on your return, there is no interest. If it is less than 85%, general interest charge applies to the difference from the date each instalment was due, and a penalty can apply if the variation was careless.

Example: your actual tax for the year turns out to be $20,000, so 85% is $17,000. You varied down and paid $12,000 in total. Interest runs on the $5,000 shortfall back to the instalment due dates, and the whole $8,000 balance is due when the assessment issues. That is why a variation only works when income really has fallen.

Vary, or set up a payment plan?

Three questions usually settle it:

1. Has your income actually dropped since the return the instalment is based on? If yes, vary. That is exactly what the system is for.
2. Is the instalment about right but the cash is not there this quarter? Lodge on time and set up an ATO payment plan for the instalment instead. Interest runs on the plan, but you avoid the 85% shortfall and the year end lump sum.
3. Are you unsure what the year will look like? A modest variation combined with a plan for the balance is often safer than varying to nil and hoping.

Whatever you choose, lodge the activity statement on time. An unlodged statement attracts the failure to lodge penalty and blocks a payment plan.

If you have already varied too low

You can vary again upwards on the next activity statement, and you can make a voluntary payment at any time to reduce the shortfall. Interest on an 85% shortfall is GIC, so it can be the subject of a remission request if there was a genuine reason for the misestimate, such as a late change in income you could not have foreseen. If the year end bill is more than you can pay, the same options as any unpaid instalment apply: pay what you can, then a plan.

What to do next

1. Estimate your actual tax for the year honestly before deciding whether the instalment is too high.
2. If income has fallen, lodge the variation on or before the instalment due date with a reason code.
3. If the instalment is right but unaffordable, lodge on time and set up a payment plan instead.

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