How SMBs can win up to $15k early through PAYG variance

“[Some clients believe that] whatever the ATO sets the amounts to is just gospel, and they have to go with that, they just have to pay it, and they’ll get those amounts back as a credit at tax time the following year.”

“Especially for our small business clients [accountants should] do those regular quarterly reviews to actually see if those instalments are still in line with their current performance – especially for the small businesses with a tight cash flow.”

Variance

This leaves the option of varying a small business client’s PAYG withholding open, where small business owners can “save” up to $15,000 by receiving this amount earlier than their return.

“I’ve actually seen them in excess of $10,000 to $15,000 per quarter.”

“I had one client in a year; they had a phenomenal amount of bank interest because they sold an investment property, and then they put the money into a term deposit. And then that term deposit matured during the financial year, so then that interest went onto their tax return.”

While de Jager told the brand that it is not necessarily a tax saving, it can provide an early injection for the business.

“It’s not a tax saving, but it’s a dollar-for-dollar cash flow saving.”

“If you pay these four quarterly amounts without really knowing what’s going on, and then you get it back in 12 to 15 months’ time, it’s money that’s been sitting with the ATO rather than yourself for all that time.”

“In that time, you could have earned another $500 of bank interest, or put it in your home loan offset account and saved interest in that way.”

While accountants can use this for the benefit of their small business clients, de Jager emphasised the due process behind this.

“Once the ATO puts you onto that instalment system, you do have to give a reasonable explanation of why you’re going to vary down that instalment, with the reasons that are stated on the form and when you actually go to complete it.”

Bridging the knowledge gap

PAYG withholding is a mandatory tax liability for business owners. “It takes years for small business owners to understand that GST, PAYG withholding, and PAYG income tax instalments are all different things,” de Jager told the brand.

“Understanding all those different obligations is so critically important, especially for cash flow management.”

He said that some clients see PAYG as a double tax which they can avoid.

“They don’t quite understand that that’s tax paid in advance; they think it’s a separate tax”.

He noted that understanding many of these liabilities is a big adjustment for a young business, as the tax liabilities only arrive after the first year.

“In the first year of a business starting, there’s no tax withheld or anything by an employer; they haven’t paid these instalments or anything like that, so they’re realistically not getting taxed till they do their first tax return for the business that financial year.”

He said that some clients may put pressure on their accountants to vary instalments to nil; an action which may lead to potential consequences of not paying taxes for the quarter.

“If there are reasonable grounds, you still have to pay those instalments; if you vary it down below 85 per cent, the ATO can charge that general interest charge, which is also no longer tax-deductible.”

As the unpaid tax continues to be unpaid, de Jager noted that it will continue to carry forward for small business owners.

This follows the ATO’s warning last month that understating PAYG can lead to GIC liabilities.

Despite these risks, de Jager acknowledged that small business owners have a lot of liabilities to keep track of, such as GST, quarterly or monthly BAS returns, PAYG withholding, or potentially the PAYG income tax instalments for the company.

Falling behind on these liabilities is what de Jager has heard to be called a “cash flow death”.

“It’s a lot for them to keep track of, and a lot of people in small businesses are trading through trusts or companies, so it can be difficult sometimes to just make sure that all these lodgements are actually being done across the different entities and the personal.”

“That’s where we, as accountants, need to make sure we are very clear in our communication: what is our job to do for the client, what our scope is for the client, and what the client is looking after themselves.”