Reducing PAYG payments (i.e. the tax withheld from salaries or wages) is allowable and advisable in a number of circumstances. They may be referred to as section 221D tax variations.
Whilst there is a general rule is that assessable income of an employee must include allowances, and PAYG withholding tax must be deducted by the employer on such income, there are a number of exceptions:
- Automatic – certain allowances are effectively tax free, and are automatically excluded from the PAYG requirements by regulation, a specific variation application not being necessary. See PAYG Withholding Variation: Allowances and certain types of income
- By request – when the employer separately identifies an allowance in the accounting records, for which an employee is properly able to claim a tax deduction for the associated expenditure, then the employee can request that the PAYG tax withholdings on the allowance be reduced or removed. This can include a negative gearing loss.
More cash in each pay
After processing the tax variation (i.e. tax reduction), an employee gets the extra cash in each payroll, rather than waiting until a tax return is lodged for the year in order to receive a credit or refund of the tax on the allowances.
This applies to such things as car, travel and phone allowances, which are fully or partly tax deductible expenses when paid and claimed within the rules, and when there are negative gearing or other losses which may be claimable.
A variation application is also for use in varying HELP or Financial Supplement PAYG withholdings and in a number of other circumstances.
Variation requests may be lodged via an electronic form (requiring the installation of form-filling software supplied by the Tax Office), or by physical lodgment on form number Nat 2036 which must be ordered from the Tax Office. See Withholding declarations and variations
Note: The Tax Office’s deadline for each financial year is 30 April. Applications after that date will be applicable to the next financial year commencing on 1 July.
This page was last modified on 24 Aug 2017.