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What is the PAYG Tax System
Those of us who are employees have taxes automatically withheld each payslip. At the end of the tax year, we submit our tax returns and claim back any deductions.
Most people consider their tax return like a sort of bonus, for spending on a new TV or holiday.
But a tax return is just what the ATO owes you, as you have paid too much tax through the year.
Self-employed individuals, on the other hand, receive income untaxed. If they (or their business) earns less than $75,000 this tax is due after the end of the tax year. Many save the tax owed for over a year in a mortgage offset account. It’s a great way to save on interest as long as you won’t accidentally spend it! If they earn more than $75,000, they need to register for GST and pay tax quarterly.
The PAYG system means employees don’t have to worry about calculating tax owed on gross income. This is great for those who have not developed a good money management system.
Time to Level Up?
But I’m sure many of my readers are strong money managers. Once you have complete control over your finances, it’s time to start looking at how to get things working, even more cost-efficiently.
Paying too much tax through the year only to be paid back in a tax return is essentially loaning out your cash to the ATO for free. They won’t pay you interest, although they will charge it if you are late in paying.
The ideal situation is to instruct your employer to withhold exactly the right amount of tax. Then that extra money can be funnelled into investments, or paying your mortgage down.
It is possible to vary PAYG tax withholding. If you know you will receive a roughly $10,000 tax refund at the end of the year, you could alternately ask your employer to withhold $400 less each fortnight.
Also, if your income tends to vary significantly from month to month but you have a predictable annual salary, you can request to vary PAYG to an appropriate amount of tax each pay.
Why You May Not Want to Vary PAYG Tax Witholding.
There are a few traps to watch out for when deciding whether to vary PAYG withholding.
- You won’t recieve enough of a tax refund to make the effort worthwhile. Owners of negatively geared property will benefit the most from varying PAYG tax. Those with few deductions to claim will probably find it’s not worth the effort
- You must be fairly accurate. Some might be tempted to game the system by getting reducing your PAYG witholding too much. The ATO are not going to give you essentially an interest free loan. If they think you have purposely witheld less tax than you need to pay, the ATO will penalise you.
- You must have excellent money management skills to make this worthwhile. Many people use their tax refund as “forced savings”. If they were to vary PAYG to reduce tax witholding, it is very likely they will spend the extra income (and not even notice). If you reduce your PAYG tax witholding, set up a direct debit for the corresponding amount to be directed into savings or investments.
- Varying PAYG withholding does not just mean making changes every now and then – it requires continuous attention throughout the year. Things change frequently, including expected income and deductions. You need to make sure your PAYG witholding is as accurate as possible.
How To vary PAYG withholding:
- Visit Mygov and log in
- Go to the the ATO website
- Click on “tax” then “Manage” then “PAYG witholding variation”
- Complete the form including up to two reasons for varying the PAYG witholding.
You will need:
- Your employers ABN or WPN
- Employer’s payroll phone number
- Your employee number or DOB
- You will need to have lodged all due tax returns (or completed documentation as to why you don’t need to lodge a tax return).
- You’ve already have paid all moneys owed
- You must know your expected income and tax liability
Calculating your Tax Liability
One of the most common ways to vary PAYG withholding is by using a special calculator that can be found on ATO’s website. This tool will help you determine how much variation should occur based on your circumstances, but it’s important to note there are some limitations as well.
For example, many people don’t qualify for varying PAYG if they receive commissions or bonuses instead of an actual salary. Other things like changing jobs mid-year may also affect one’s eligibility for varying tax rates because different rules may apply depending on who you’re employed with at any given time.
By vary PAYG, we mean that the amount of income tax withheld from each payment can be changed. This is done through a process called variation and allows individuals to pay too much or too little in taxes throughout the year.
Aussie Doc Freedom is not a financial adviser and does not offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.