This article explains the gross domestic product (GDP) adjustment the tax office uses to work out your pay as you go (PAYG) instalment amount for 2008-09.
SO, HOW DOES THE ATO WORK OUT YOUR PAYG INSTALMENT AMOUNT?
The ATO bases the PAYG instalment amount printed at box T7 on your activity statement or instalment notice on the income tax you would pay on your business and investment income (excluding any capital gains) from your most recent income tax return.
Each year, under law, the ATO applies the GDP adjustment to reflect expected growth in the economy. The ATO then applies the current marginal tax rates to your adjusted income to work out your PAYG instalment amount.
Your PAYG instalment amount may change during the income year if you:
- vary your instalment amount, or
- lodge a subsequent income tax return.
WHAT IS THE GDP ADJUSTMENT?
The ATO wants your PAYG instalment amounts to reflect your expected tax liability for the current income year as accurately as possible, so they adjust your PAYG instalment amount to reflect expected changes in the economy. This adjustment is called the GDP adjustment.
If your PAYG instalment amount was solely based on your previous tax situation without being adjusted, it might not cover your actual tax liability, leaving you with an additional payment to make when you lodge your annual income tax return.
WHAT IS THE GDP ADJUSTMENT FOR 2008-09?
From 1 July 2008, the GDP adjustment used to work out your quarterly PAYG instalment amounts is up one percent from 7% in 2007-08 to 8% in 2008-09. The GDP adjustment is updated at the start of each income year using national accounts data from the Australian Bureau of Statistics (ABS).
WHY MIGHT THE GDP ADJUSTMENT BE DIFFERENT TO CURRENT ECONOMIC CONDITIONS?
Sometimes the GDP adjustment does not match up with current economic conditions because it is worked out using inforrnation from earlier years. When economic growth slows, the GDP adjustment may seem relatively high, while in conditions of sudden economic growth, the GDP adjustment may seem relatively low.
WHAT IF THE PAYG INSTALMENT AMOUNT DOES NOT MATCH YOUR EXPECTED INCOME TAX LIABILITY?
If you think the PAYG instalment amount the ATO worked out will be too high or too low, you can
- pay the PAYG instalment amount they worked out and they will refund any overpayments or make up any shortfall when they assess your income tax return
- vary your PAYG instalment amount each quarter, or
- work out your PAYG instalment amount yourself (this option is generally only available in your first quarter).
IMPORTANT CAUTIONARY WORDS
You may have to pay the general interest charge if you vary your PAYG Instalmenl amount down and end up paying less than 85% of the tax you should have paid on your business and investment income.
However, you will not be liable for penalties on your PAYG instalments if you
- choose to pay the instalment amount they work out for each quarter, and
- do not vary your instalment amount in any quarter.
About The Author
Warren Kruger is an Australian Tax Specialist and Advisor.
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Warren Kruger is an Australian Tax Specialist and Advisor. For a FREE Report “7 Essential Strategies to Reduce Your Taxation NOW!”,enter your name and email address in the Opt In Box located on the top right hand side of this article.
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