Get your refund now! – The tricks and traps when varying your tax

With current cost of living pressures, rising interest rates and inflation, there are only so many ways you can save money. Most people will lodge their tax returns each year with the hope of a decent refund that will help to pay off that credit card or go a much needed holiday. The problem with this is that you have to wait until 1 July each year to be able to get this money.

What many people don’t realise is that the ATO allows you submit what is called a PAYG Withholding Variation or more simply - Tax Variation. Varying your tax downwards results in a higher tax home pay packet that you receive when you get paid. For example, if you would normally receive a tax refund of $6,000, a Tax Variation will result in you receiving an additional $500 per month via your payroll. For those with negatively geared investment properties, this is a powerful tool as it allows the additional cashflow to be used to pay down debt sooner or to be deposited into an offset account for use at a later date.

To be eligible for a Tax Variation, you need to ensure that all tax obligations are up to date, and no debts are owing. It also works best for salary and wage earners. If you work overtime, the Variation may need regular reviewing to ensure income hasn’t been understated. If you are a sole trader, varying your PAYG Instalment each period will have the same effect.

It is also important to note that if you had a Tax Variation in place in for the prior tax year and that year’s tax return resulted in you have to pay tax to the ATO, the ATO may reject your application. To avoid this, it is important to:

• Update your application whenever your circumstances change. This could be changes in your employment, rental increases or interest rate changes. You can submit as many applications during the tax year as required provided you submit no later than 30 April.
• Don’t be aggressive. Ensure that you are conservative in the income and deductions included. If unsure, overstate income and understate deductions. You want the Variation to provide you with cashflow benefits but not at the cost of missing out next year. As the Tax Variation is an annual application, ideally you would want to have the Variation in place for 1 July each year. Don’t worry if you can’t meet this deadline as the ATO will factor in the tax already withheld when varying your tax rate. Effectively the later in the financial year the Variation is processed, the lower your tax rate will be resulting in a higher tax home pay.

Tax Variations are a valuable tool but can also result in unnecessary tax consequences if not prepared correctly. It is important to speak with your client manager to confirm whether a Tax Variation is worthwhile. At the date of writing, it is the midpoint of the financial year and for those who have already processed a Tax Variation, it is the ideal time to have your situation reviewed.