PAYG
Withholding variation
A withholding variation is an ATO-approved change to the amount of tax withheld from a worker's payments, usually to better match their expected tax liability.
A withholding variation lets an individual ask the ATO to approve a different rate of PAYG withholding from the one that would normally apply to their payments. The standard withholding tables work on average circumstances, and for some people they result in too much or too little tax being withheld through the year. A variation adjusts this so that withholding is closer to the final tax bill.
People commonly apply because they expect large deductions, tax offsets or losses that the standard tables do not take into account. Examples might include significant rental property deductions, work-related expenses, or investment losses. Others seek a variation because their income is unusually low or irregular. The result is that more of their pay stays in their pocket during the year.
The process involves the worker applying to the ATO, explaining why their circumstances justify a different rate and providing supporting details. If the ATO agrees, it issues a notice setting out the variation, which the worker gives to the payer. The payer must then apply the varied rate for the period stated. If the worker does not provide the approved notice, the payer must continue to withhold at the usual rate.
The ATO decides whether to grant a variation, and it will not do so for every request. Where estimates are unreasonable, the worker risks owing a large amount at tax time. Even with a variation in place, a person is still liable for the tax on their income. Withholding is only the prepayment. If less is withheld, the balance will be due when the return is assessed, so be prepared.
Employers should handle the notice carefully. Keep a copy, apply it from the date and for the period it covers, and do not vary withholding on your own initiative. Using the wrong rate can leave you liable for under-withheld tax. If a notice has expired, return to the standard tables unless a new notice is provided.
Retain the notice and related payroll records for five years. This is general information only, so confirm whether a variation suits your situation with the ATO or a registered tax professional.
Worked example
Ravi earns $90,000 as an employee but expects $20,000 of deductions from a rental property that the standard tables do not allow for. He applies to the ATO for a withholding variation and, after approval, gives the notice to his employer, who then withholds less each pay. He knows his final tax is still based on his actual income, so he keeps funds in reserve.
Practical tips
- Base any variation request on a realistic estimate, because the tax is still owed at assessment.
- Employers should only apply a varied rate when they hold the ATO's notice, and should note when it expires.
- Keep the notice with payroll records for five years.