Reducing your PAYG instalments may give your cash flow some breathing room today. But if the reduction isn’t supported by a realistic estimate of your tax position, it could create a bigger bill later.

The ATO is contacting taxpayers who have varied their PAYG instalments to nil over multiple years, reminding them that interest charges may apply where instalments have been significantly understated.  PAYG instalments are payments towards the tax on your business and investment income, designed to spread your tax payments throughout the year. You can vary your instalments if your circumstances change and the amount you are paying no longer reflects your expected tax liability. However, reducing your instalments does not reduce the total income tax you owe for the year.

If you vary your instalments downwards and underestimate the tax payable on your business and investment income, you may be charged general interest charge (GIC). Broadly, this risk arises if your varied instalments are less than 85% of the tax you actually owe for the year. Penalties may also apply in some circumstances, such as where false or misleading information is provided. They do not automatically apply simply because your estimate falls below the 85% threshold.

Your variation should reflect your expected tax position, supported by current financial information and reasonable forecasts. Before reducing your instalments, review your business and investment income, consider expected deductions and profitability changes, and keep records of your calculations. It's also wise to review your estimate during the year and adjust it if circumstances change.

Varying your instalments to nil can be appropriate where you reasonably expect no relevant tax liability. It should not become a routine way to defer tax payments. Managing cash flow means planning for tax as well as your day-to-day expenses. Checking your PAYG instalments regularly can help you avoid an unexpected year-end bill and unnecessary interest charges later. If you've reduced your instalments—or are considering it—we can help review your tax estimate, document your variation, and plan for the payments ahead.

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Please also note that many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances. Should you have any further questions, please get in touch with us for assistance with your SMSF, business, bookkeeping and tax requirements. All rights reserved. Brought to you by RGA Business and Tax Accountants. Liability Limited by a scheme approved under Professional Standards Legislation.