ATO PAYG variations

Occasionally, an employee can decrease the amount of tax withheld from their salary. The employee must apply and obtain an approved withholding variation from the ATO in order to have their tax decreased in payroll.

This is also known as a ‘downward variation’.

What process must the employee follow to vary their PAYG?

In order to vary the withholding amount, a tax variation application form needs to be completed by the employee. This claim is known as the PAYG withholding variation application (NAT 2036 or e-variation).

The processing time for an application depends on the method used to lodge their application.

·         online using an e-variation is within 28 days

·         by paper is within 56 days

Once submitted by the employee, the ATO reviews the application and determines the applicable percentage of tax that needs to be applied to the employee’s salary and wages.

The ATO will send a confirmation letter to the employer once it is approved.

What can the employer expect on the variation letter?

The withholding variation letters from the ATO is very specific and will state the:

·         Employer’s business name and ABN

·         Employee’s name

·         Tax percentage to withhold

·         Items to apply the tax reduction for (Salary & Wages, Bonuses, Car Allowance etc.)

Here are some recent helpline questions that we would like to share…

I have received a letter from the ATO on 16 July with the new tax variation for an employee which I have already paid on 15 July. Do I have to adjust the tax to correct what I have paid the employee?

There is no requirement to backdate variations. The variation comes into effect from the next available pay after the employer has received the letter from the ATO.

You are not allowed to reduce the amount that you withhold from the employee’s pay until the confirmation letter has been received from the ATO.

What happens if the employee changes employer part-way through the year?

A withholding variation is valid for one employer and ABN.

If an employee joins your company part way through the financial year, they cannot use the same variation letter that was in place with their previous employer.

The employee will need to re-apply for another variation with the new employer.

We have an employee with a withholding variation and will be terminated next pay. Can we apply it to their termination pay?

Normally the variation does not apply to the termination. You can only apply the variation to the termination if the variation specifically includes termination payments.

Bonus note for bonus payments

If the employee wants the tax deduction applied to a bonus payment, they would need to include bonus information in the original application and the approval letter from the ATO also needs to specifically include “bonuses” in the variation letter.

If bonuses are not mentioned and the employee receives the bonus, it must be taxed at marginal rates.