The PAYG Instalment system is designed to help taxpayers manage their tax payments more effectively. While the ATO prefills default amounts based on the previous tax return, we know there are many situations where the amount needs to be varied, either upwards or downwards.
The ATO has a specific formula for varying PAYG instalments (option 1). GovReports activity statements include the relevant fields for varying the PAYGI; however, formulas must be used to ensure that the reported numbers are in alignment and agree with the ATO calculations. This sometimes makes it tricky to calculate the amounts that should be entered in each field to make the form comply with the ATO’s calculations.
The ATO estimates PAYG instalments based on the last tax return and divides the amount equally across the four quarters, i.e., 25% of the total estimated tax each quarter.
However, if, for example, the tax return has been assessed after the first quarter activity statement has been submitted, and PAYGI is started in the second quarter, then the ATO automatically applies 50% to the next BAS, with 25% payable for the remaining two BASs, taking into account any payments already made.
The calculation can sometimes be confusing when the client’s circumstances have changed, but the ATO is still populating the BAS with the default amount based on the previous tax return. In this case, you may need to force the calculations by entering figures to make them work.
Activity Statement Fields for PAYG Instalments
- T1 – income for the period
- T2 – rate (percentage of income)
- T3 – varied rate
- T11–income x rate (total tax payable for the period)
- T7 – the ATO default instalment amount
- T8 – estimated tax for the year
- T9 – varied instalment for the period
- T4 – the reason for variation
- 5A –the varied amount for the period
- 5B –credit from PAYG instalment variation
Downwards Variations
If you have paid too much on a previous activity statement and need to claim a credit, there is a time limit in which you can vary the activity statement you have submitted.
The time limit is based on the due date of the activity statement. If you try to vary the overpaid PAYGI after the due date, it will be rejected. If the time limit has passed, you can claim a credit for the overpaid PAYG instalment on the next BAS.
You would generally only claim a credit if the overpayment amount is significant and would affect the client’s cash flow. Otherwise, you can take this into account in the following BAS and vary the amount accordingly.
If a client needs a payment plan for an activity statement that includes significantly overpaid PAYGI, speak to the ATO and inform them of the situation so that any penalties or interest will be remitted. The best option in this instance is to submit the next BAS as soon as possible, claim the PAYGI credit, and then organise the payment plan.
Remember that the client may be penalised if you underestimate the tax payable. Actual instalments paid are compared to the total tax payable. If the varied instalments are less than 85% of the total payable, there may be a general interest charge on the difference and also potential penalties.
Downwards Variation Example
The September 2023 and December 2023 BASs have been submitted with the ATO instalment amount of $3,290, based on the previous year’s tax return for 2022. In March 2024, the client received a notice that the 2024 financial year’s estimated tax was $19,267 based on the 2023 assessment.
The March BAS included a default amount of $9,209 payable; however, this would cause hardship for the client and is, in fact, higher than expected using the ATO calculation method, so the amount can be varied downwards.
Take the total expected tax amount and divide by four to get the default quarterly instalment amount.
Add up the amount the ATO was expecting for the BASs that have been submitted.
Subtract the amount already paid.
In this example, the client pays more in the March BAS to catch up for the previous quarters but then pays the default amount on the June BAS. The same amount will be populated in the next financial year’s BAS until the tax return is completed and the ATO provides new estimates.
| Instruction | Calculation |
| Take the total amount and divide by four to get the default quarterly instalment amount. Enter the total amount into T8 | $19,267 / 4 = $4,816.75 |
| Add up the amount the ATO was expecting for the BASs that have been submitted. | 2 x $4,816.75 = $9,633.50 |
| Subtract the amount already paid to calculate the amount owing on previous quarters. | 2 x $3,290 = $6,580 $9,633.50 – $6,580 = $3,053.50 |
| Add the amount outstanding for previous quarters to the current quarter. Enter the varied amount into T9 and 5A | $3,053.50 + $4,816.75 = $7,870.25 |
| The final quarter instalment will be the default amount. | $4,816.75 |
| Total tax paid for the year will equal the ATO notice for 2024. | $3,290 + $3,290 + $7,870.25 + $4,816.75 = $19,267 |
Upwards Variations
Whilst it is not necessary to vary an instalment amount upwards, it can be helpful to clients to pay more throughout the year rather than being slugged with a large tax bill later. If income is higher, it makes sense to vary the instalment upwards. However, you can complete the activity statements with the default amounts, knowing that the tax balance will be paid in a lump sum once the tax return has been completed.
Upwards Variation Example
The September 2023 and December 2023 BASs have been submitted with the ATO instalment amount of $3,290, based on the previous year’s tax return for 2022. In March 2024, the client received a notice that the 2024 financial year’s estimated tax was $19,267 based on the 2023 assessment.
The March BAS included a default amount of $9,209 payable; however, the client’s turnover significantly increased, and this trend is expected to continue.
Estimate expected turnover and tax payable for this financial year.
Take the total expected tax amount and divide by four to get the estimated quarterly instalment amount.
In this example, the client pays more in the March BAS to catch up for the previous quarters but then pays the default estimated amount on the June BAS.
| Instruction | Calculation |
| Estimate turnover and income tax payable for the financial year. | $30,000 |
| Take the total amount and divide by four to get the default quarterly instalment amount. Enter the total amount into T8 | $30,000 / 4 = $7,500 |
| Add up the amount owing for the current year’s estimate. | 2 x $7,500 = $15,000 |
| Subtract the amount already paid to calculate the amount owing on previous quarters. | 2 x $3,290 = $6,580 $15,000 – $6,580 = $8,420 |
| Add the amount outstanding for previous quarters to the current quarter. Enter the varied amount into T9 and 5A | $8,420 + $7,500 = $15,920 |
| The final quarter instalment will be the default amount. | $7,500 |
| Total tax paid for the year will equal the estimated amount for the year. | $3,290 + $3,290 + $15,920 + $7,500 = $30,000 |
Using the PAYG Instalment Rate (Option 2)
If the default instalment amount estimated by the ATO is not appropriate because of frequent changes to business income, you can elect to calculate the instalment amount based on a percentage supplied by the ATO. The percentage rate is calculated on the last tax return. By using this method, the PAYG instalment amount will automatically align with the income for each period. You’ll only need to vary the rate if business circumstances have changed enough that the proportion of income to expenses changes significantly. In this case, you can follow the steps at the ATO link below to vary the rate.
You can swap to PAYG Instalment option 2 in the first quarter of a new financial year.
If you use the information in this blog to complete your PAYG instalment variations, you should have an easier time! If you need help, contact GovReports support at or ring us on 1300 65 25 90.
GovReports Team
ATO – How to vary your PAYG instalments
P.S.Talk to us to learn more about saving time with GovReports, or check out our previous webinars on practice management tools.
