PAYG instalments: To vary or not to vary?
The PAYG instalment system (i.e. the system for making regular payments towards the expected annual income tax liability of a taxpayer) only applies to businesses or individuals earning business and/or investment income above a certain amount.
The ATO calculates the PAYG instalment rate based on the information reported on the latest tax return and if this calculated rate results in too much tax being paid, the business or individual will receive a refund of any overpayment once their tax return is assessed. Conversely, if insufficient PAYG instalments have been paid, a tax liability for the difference will arise.
If a taxpayer’s circumstances change in the current income year compared to the information in the prior year’s tax return (e.g. a current year may not be as profitable as the previous year) the taxpayer may want to lower their PAYG instalments for the current year.
However, if such a downward variation results in a greater than 15% shortfall of the actual amount of tax payable when the current year’s tax return is assessed by the ATO (i.e. there was an underestimate of the instalment rate or amount for the current year), the taxpayer may be subject to the general interest charge (GIC) on the difference. Therefore, a reasonable degree of certainty of the changed circumstances must exist before varying the ATO’s PAYG instalment rate.
As a general observation, most people prefer to pay PAYG quarterly instalments as they earn their income similar to an employee who has PAYG withholding tax deducted from their salary. The benefit of the PAYG instalment and withholding systems is that a large tax bill at the end of the income year, and the consequent need to find the cash to pay the bill, is avoided.
We recommend that you contact us before varying a PAYG instalment to avoid unnecessary penalties.
SMSFs and non-arm’s length income
SMSFs must transact on an arm’s length basis (e.g. the purchase and sale price of SMSF assets should always reflect the true market value of both the SMSF asset and returns). Any non-arm’s length income will be taxed at the highest marginal tax rate.
Furthermore, individuals who have used their self-managed superannuation funds (SMSFs) to borrow from related parties to fund the acquisition of properties – usually through using non-commercial limited recourse borrowing arrangements (LRBAs) must ensure that those borrowing arrangements are on arm’s length terms (e.g. there must be market interest rates, commercial lending periods and principal and interest repayment arrangements).
We can assist you in restructuring your borrowing arrangements to minimise the risk that income generated from the LRBA will be taxed at 47% as non-arm’s length income (NALI).
Tax treatment of cryptocurrencies
Cryptocurrency (i.e. a digital asset where encryption techniques are used to regulate the amount of units) is currently a big buzzword in Australia.
Because a cryptocurrency is treated like a CGT asset (as opposed to money or currency), a CGT event will occur when a cryptocurrency is disposed of and tax will have to be paid on any capital gain made on the disposal of such a cryptocurrency bought as an investment.
Taxpayers need to keep proper records (e.g. the date of the transaction, the value of the cryptocurrency a time of the transaction and what the transaction was for and who the other party was) in relation to such cryptocurrency transactions.