PAYG withholding variations: get your tax benefit in every pay
If you own a negatively geared rental property or have other large deductions, you probably receive a big tax refund every year. That refund is your own money, overpaid through your salary and returned months later. A PAYG withholding variation lets you have it in each pay instead.
How it works
Your employer withholds tax from your pay based on your salary alone. It doesn’t know about your rental loss or other deductions, so too much tax is taken.
A PAYG withholding variation is an application to the ATO, setting out your expected income and deductions for the year. If it’s approved, the ATO notifies your employer of a lower withholding rate, and your take-home pay goes up straight away.
An example
Priya earns $120,000 and expects a rental loss of $15,000 for the year after interest, expenses and depreciation. Her marginal rate is 30% plus the 2% Medicare levy.
Without a variation, she’d get roughly $4,800 back after lodging her return, sometime after July.
With a variation, her withholding drops by about $185 a fortnight, so she has the money through the year to help pay the mortgage on the property, or into an offset account where it saves interest.
Who it suits
- Employees with a negatively geared investment property
- People with large, regular deductions, such as substantial work-related expenses or personal super contributions they’ll claim
- Anyone whose refund is consistently large and predictable
It doesn’t suit people whose deductions are small, irregular or hard to estimate, or whose income varies a lot.
How to apply
You (or we, as your tax agent) lodge a variation application with the ATO showing your estimated income, the deductions you expect, and your rental property details. Applications are usually processed within a few weeks, and the ATO then notifies your employer.
A variation generally applies for the current income year only, so it needs to be renewed each year. Applying early in the year spreads the benefit over more pays.
The risks
- Over-estimating your deductions. If the loss turns out smaller than you claimed, you’ll have a tax bill at the end of the year instead of a refund.
- Changes during the year. Selling the property, interest rates falling, the property becoming positively geared, or a pay rise all change the numbers. Tell the ATO and lodge a new variation.
- Spending it. The extra pay is only useful if it’s going towards the property or savings, not absorbed into everyday spending.
Asking for more tax to be withheld
It works in reverse too. If you have income with no tax withheld, such as a side business, rental profit or investment income, you can ask your employer to withhold extra from your pay so you don’t face a bill at tax time.
Not the same as PAYG instalments
If you run a business or have investment income, you may pay quarterly PAYG instalments towards next year’s tax. Those can also be varied if your income drops, but that’s a separate process, done through your activity statement.
We prepare variation applications as part of our personal tax service, using your rental schedule and last year’s return so the estimate is realistic. See also negative gearing explained.