PAYG Income Tax Withholding Variation Explained

By FutureNestEgg | August 27, 2009

If you are on a salary then you are on a PAYG (Pay As You Go) – This means your employer is basically withholding some part of your gross salary and sending it to ATO. The employer does this for every pay you get (be in weekly, fornightly, monthly – irrespective of the frequency). The amount the employer sends ATO is called Tax Withheld.

This is done because when you earn a salary you have to pay the tax to ATO (obviously) – and so rather than wait for you to pay at the end of the year, ATO expects to be paid by employer from your gross salary, every time you get paid.

Stay with me here – Now at the end of the year you file your tax return. Sum of all the tax withholding amount paid to ATO aon your behalf by the employer, is the total amount you paid to ATO. When you file your return, you list down all your deductions – education, property investments etc. The deductions are the amount the tax office owes you. The difference between what you paid and what you are owed will be your tax refund amount. If there are no deductions then you get no refund and viceversa.

Now imagine someone with a considerable amount of deductions – usually someone with property investments or margin loans. This person has to still pay the investment related expenses during the year – can’t wait for end of the year and pay. So this person, rather than wait for a tax refund at the end of the year, he can apply for a reduction in tax withheld amount – this way his take home salary will increase.

To be eligible for this reduction in tax withholding amount, you need to fill up a form called PAYG withholding variation application. Once ATO accepts the form, they will inform your employer to reduce your tax withheld amount. One quick point though – bear in mind that if in a year, your deductions were not large enough to accommodate the reduction in your tax withheld amount, then at the end of the year, you will have to pay the tax office.

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