PAYG instalments is a system that helps taxpayers manage expected future tax liabilities on their SMSF income for the current income year by making regular payments in advance. To assist taxpayers experiencing financial difficulty as a result of COVID-19, the ATO is enabling tax payers to vary SMSF PAYG instalments without penalty for the current financial year due to the economic impact of the pandemic.
Vary SMSF PAYG instalments or not?
Where an SMSFs estimated income for the financial year is likely to be significantly reduced, an SMSF has the option of reducing the amount of PAYG instalment paid each quarter.
The ATO has confirmed where a taxpayer decides to vary their PAYG instalment for the 2019-20 financial year, they will not apply penalties or charge interest on varied instalments as part of their support in regards to COVID-19.
More information on this measure here: ATO - Vary pay as you go instalments.
Specifically for an SMSF, the following factors need to be reviewed before a decision is made to vary SMSF PAYG instalments:
Will the income of the SMSF for the financial year 2019-20 be significantly lower than expected?
Have concessional contributions from the members or employers stopped or reduced?
Has the income from investments such as rent on property investments reduced?
Has other taxable income of the SMSF reduced meaning less expected tax for the financial year?
It's worth noting that many ASX listed companies had already declared and scheduled the payment of their interim dividends during the current 2020 financial year, so for SMSFs that receive income from ASX company dividends, there is unlikely to be a reduction in income from that source.
In addition, many SMSF will still receive employer contributions relating to the March 2020 quarter even though the members employment situation has changed.
How to vary SMSF PAYG instalments
PAYG instalments are mostly calculated based on a fixed dollar amount. The amount is calculated based on the previous income tax return lodged by the SMSF.
To vary the SMSF PAYG instalment, on the activity statement complete the following:
T8 – the estimated tax for the year. If this is nil, enter 0
T9 – the varied instalment amount for the quarter. If this is nil, enter 0
T4 – the variation reason code (use reason code 23 – significant change in trading conditions).
5A – PAYG income tax instalment amount. If you’re filling in a paper form, enter the amount from T9.
How to claim a credit on PAYG instalments already paid
It's possible to claim back a credit from PAYG instalments previously paid for the 2019–20 year.
To do this, the tax payer can complete the amount at label 5B on the activity statement. If a taxpayer chooses not to claim back PAYG instalments already paid and ends up overpaying the PAYG instalments, those amounts will be credited back after the tax return is processed.
This option might be useful for SMSFs that receive larger concessional contributions from their members (via their business or personal deductible contributions) later in the financial year where the member is no longer going to make the contribution due to the business impact of COVID-19.
A PDF fact sheet from the ATO can be downloaded here: ATO SMSF Vary PAYG Instalments
How we can help
Included as part of our service for all SMSFs we administer is preparation and lodgement of all quarterly SMSF activity statements.
If you would like to discuss the option of varying a PAYG instalment for an SMSF, please contact us.