As we enter the new financial year, the Australian Taxation Office (ATO) continues to focus on PAYG income tax instalments, particularly where taxpayers vary their instalments down during the year.
We’re seeing increasing scrutiny from the ATO where variations result in a material shortfall at year end. While varying instalments can be appropriate, it is important that any variation reflects a reasonable estimate of your expected tax position.
PAYG instalments are prepayments of your expected income tax liability. They help spread your tax payments across the year, rather than leaving you with a large amount payable when you lodge your tax return. If your income or circumstances change, you can vary your instalments, so they better reflect your expected tax outcome. However, this needs to be done carefully as the ability to vary PAYG instalments should not be viewed as a mechanism to defer tax payments until lodgement of the tax return.
The ATO has released PCG 2026/D3 Dynamic pay as you go instalments and general interest charge on excessive variation – ATO compliance approach outlining how the Commissioner will treat excessive variations of PAYG instalments and in what circumstances the General Interest Charge (GIC) will be applied. The PCG emphasises the use of the ‘dynamic PAYG instalment method’ whereby a taxpayer has taken reasonable care in using data obtained from their business accounting software to calculate PAYG instalment that reflect current financial performance.
The ATO allows you to vary your instalments, but it expects you to take reasonable care when doing so. After your tax return is lodged, the ATO compares the instalments you paid with your actual tax liability. Where your instalments are less than 85% of your final tax liability, the ATO may apply additional charges.
The 85% threshold
This 85% threshold is a key risk area. If your instalments fall below this level, you may be exposed to:
- General interest charges on the shortfall.
- Potential penalties, depending on the circumstances.
In practical terms, this means that reducing your instalments by more than 15% below your actual tax liability can result in additional costs.
General Interest Charge (GIC)
The ATO applies a general interest charge where amounts are paid late or where instalments are underestimated. This interest is calculated daily on a compounding basis. The rate is reviewed quarterly and is currently over 11% per annum for the July to September 2026 quarter. The charge can apply retrospectively, which means the cost may build up across the year if instalments have been set too low.
When penalties may apply
In some cases, the ATO may also apply penalties in addition to interest. This can occur where the ATO considers that:
- The variation was not based on a reasonable estimate.
- You did not take reasonable care.
- The information provided was false or misleading.
The ATO has signalled through recent guidance that it is monitoring excessive or repeated variations that undermine the PAYG system.
How to manage your position
Varying your PAYG instalments can be an effective way to manage cash flow, but it is important to approach this carefully. We recommend that you:
- Base any variation on current financial information and realistic forecasts.
- Review your position regularly during the year.
- Keep clear documentation supporting your estimates.
- Exercise caution if considering a significant reduction.
How we can help
We understand that managing cash flow is critical, particularly in a changing environment. Our approach is to work closely with you to:
- Review your current year performance.
- Prepare a reasonable estimate of your tax position.
- Support and document any variation made.
- Monitor your progress throughout the year.
This helps you stay compliant while managing your cash flow with confidence.
If you would like us to review your PAYG instalments before your next lodgement, please contact your Moore advisor. We’re here to help ensure you are well positioned and not exposed to unexpected costs at year end.
