Highlights

  • One accountant says some small business clients have freed up $10,000 to $15,000 per quarter by varying PAYG instalments.
  • Varying below 85% of the actual liability can expose a taxpayer to general interest charge on the shortfall.
  • The general interest charge, cited at 11.51% in September, has not been tax-deductible since the 2025-26 income year.
  • Over-paid instalments typically return 12 to 15 months later, once the return is lodged and assessed.

Before: a small business pays the PAYG instalment the ATO calculated from last year's strong return, even though this year is running well below it. After: the owner replaces that figure with their own estimate and keeps thousands of dollars in the business each quarter. Estimate too low, and the general interest charge (GIC) can apply to the shortfall, with no tax deduction to soften the blow.

What a PAYG instalment variation is

PAYG instalments are prepayments of income tax on business and investment income, credited against the final assessment once the return is lodged. By default, the ATO works out the amounts from the most recent tax return, a problem when this year's income runs well below last year's.

A variation lets a taxpayer replace the ATO's amount or rate with their own estimate, usually on the activity statement. It is an established feature.

The $10,000 to $15,000 claim

Albert de Jager of Byford Accountants said some small business clients have freed up "$10,000 to $15,000 per quarter" in cash flow by varying rather than paying the amount set from the prior year. That reflects some of his clients, not a guaranteed outcome.

De Jager stressed the benefit is cash flow, not a tax saving, since the final bill is the same either way. Over-paid instalments are typically refunded 12 to 15 months later.

The catch: the 85% line and non-deductible GIC

A variation needs a reasonable basis. It is an estimate of the year's actual liability, not a figure picked to ease cash flow. Vary below 85% of the actual liability and GIC can apply to the shortfall.

The GIC rate was cited at 11.51% in September. It is set quarterly and compounds daily. Since the 2025-26 income year, enacted law denies a deduction for GIC, so the full charge is borne without the offset that once softened its after-tax cost.

Relief is also scarcer: the Tax Ombudsman's latest report found penalties or interest reduced or remitted in only 5% of cases, down from 17%.

Hypothetical example: when a variation works, and when it bites

A small company's ATO-calculated instalment is $25,000 a quarter. Trading has slowed, and the director expects the year's liability to be about half that, so the company varies to $12,500 a quarter. Over four quarters it pays $50,000 instead of $100,000.

Then trading recovers and the actual liability is $80,000. The $50,000 paid is 62.5% of that, below the 85% line. Suppose GIC runs on a $10,000 shortfall for six months at 11.51%: simple interest is about $575, and slightly more because GIC compounds daily. Were GIC still deductible at a 25% company tax rate, the after-tax cost would be about $431; under current law the company bears it all. The figures are illustrative only.

How the monthly PAYG option fits in

Schedule 4 of the Treasury Laws Amendment (Tax Reform No. 4) Bill 2026, introduced by Treasurer Jim Chalmers on 27 October, would let quarterly payers elect monthly reporting and payment. It is a bill, not law; the September exposure draft proposed a 1 July 2027 start.

Monthly instalments would not replace variations. Smaller, more frequent payments could ease adjusting estimates, though they bring more due dates.

Advisers typically ask whether management accounts support lower expected income, how the estimate changes if trading recovers, and whether the business could absorb GIC. Tax Ombudsman Ruth Owen has said the ATO now offers fewer payment arrangements.

What to watch

Each quarterly activity statement is a chance to vary or revisit a variation. Also worth tracking: the quarterly GIC rate, the bill's Senate fate, and the ATO's Senate Estimates appearance on 28 October.