The ATO Is Writing to Taxpayers Who Varied PAYG Instalments to Nil for Years

What the ATO is sending, and to whom

The ATO announced the letters in its tax professionals newsroom under the heading "Reinforcing PAYG instalment obligations". In its words, it is contacting taxpayers who have varied their PAYG instalments to nil for multiple years, with information about their obligations. The letter goes to the taxpayer or their tax agent and reminds them that GIC may apply where PAYG instalments have been significantly understated.

Two details matter. The trigger is a nil variation repeated across years, not a single reduced quarter. And the letter itself does not impose anything. Under Schedule 1 to the Taxation Administration Act 1953, GIC on a varied instalment is a separate liability that the Commissioner must notify in writing, payable within 14 days of that notice (s 45-232(5)).

The ATO restates the purpose of the system alongside the letters: PAYG instalments require regular payments on business and investment income during the year, and the option to vary is there if circumstances change. For the basics, the PAYG instalments guide covers the entry thresholds, the two methods and the 2026-27 due dates.

The 85% test behind the letters

You are allowed to vary instalments down, including to zero. The ATO's variation page says that if your estimated instalment income for the year is zero, you can vary your instalment amount to zero without calculating estimated tax. The exposure comes at the end of the year.

Put in dollars: if the tax on your instalment income for 2026-27 turns out to be $20,000, the 85% line is $17,000. A nil variation is 0% of that, so any year in which you varied to nil and then reported taxable instalment income sits under the line by definition. That is the pattern the letters are aimed at.

The law sets out the measure in detail. For a varied instalment amount, s 45-232 compares your estimate with 85% of your benchmark tax, and charges GIC on the gap between an "acceptable amount" for each quarter and what you actually paid. The acceptable amount is the lower of the instalment the ATO notified and a running share of benchmark tax: 25% by the first quarter, 50% by the second, 75% by the third and 100% by the fourth. A varied instalment rate has the equivalent rule in s 45-230. Step-by-step instructions for lodging a variation are in how to vary PAYG instalments.

What a year of nil instalments can cost in GIC

Take a taxpayer on the instalment amount method whose notice shows $5,000 a quarter. They vary every 2026-27 instalment to nil, then lodge a return showing $20,000 of tax on instalment income. Under the s 45-232 table the acceptable amount is $5,000 for each quarter, so each nil instalment leaves a $5,000 shortfall.

GIC runs on each shortfall from the start of that instalment's due date to the end of the day the assessed tax for the year is due (s 45-232(4)). The quarter 1 shortfall therefore runs longest. We have assumed the assessed tax is due on 1 December 2027; your own date is on your notice of assessment, and every extra day adds to the charge.

So the year of nil instalments costs the $20,000 of tax, which was always owed, plus $1,684.99 of GIC. The quarter 1 instalment alone, due 28 October 2026, accrues $672.08 over 400 days.

Three things this example holds steady that real life will not. The rate is held at 11.51%, the ATO figure for October to December 2026, compounding daily; the ATO resets it every quarter, and the current and previous rates are set out in the October 2026 GIC rate change. The due dates are the printed quarterly dates, with quarter 2 moved to 2 March 2027 for the weekend and public holiday; lodging online or through an agent can change them. And it covers one income year. The letters are going to people who did this for several years, and each year is measured separately.

One more cost: GIC incurred on or after 1 July 2025 is not tax deductible, according to the ATO's practice statement PS LA 2011/12. The $1,684.99 is paid from after-tax money.

Reasonable care, and taxpayers hit by disasters

The ATO's message to agents is short: when varying instalments for clients, ensure their estimates are based on information that is reasonable, current and can be substantiated, and review and update variations where circumstances change.

For taxpayers affected by floods or other disasters, the ATO goes further. It says it won't apply penalties or charge interest on variations if you have taken reasonable care to estimate your end of year tax liability. That means a reasonable and genuine attempt to determine your liability, judged by what a reasonable person would have done in your circumstances. If you cannot pay an instalment, the ATO says to still lodge the instalment notice and discuss a payment arrangement.

The interest risk on variations is also what the ATO's draft guideline for Dynamic PAYG instalments addresses, but that applies to the new software method from 1 July 2027. It does not cover a variation lodged under the current system.

What to do if you got a letter

• Work out the real figure. Put this year's expected instalment income into the PAYG instalment calculator and compare the tax with what you are paying now. If the answer is well above nil, the nil variation is the problem.
• Vary again, on time. The ATO says a variation is made when you lodge your activity statement or instalment notice, on or before the day the instalment is due and before you lodge your tax return. The varied amount or rate then applies to the remaining instalments for the year.
• Keep the working. The ATO asks agents to make sure clients keep records that support variation decisions. A spreadsheet with the income estimate, the date and the reason code used at T4 is the minimum.
• If in doubt, do not vary. The ATO's own advice: if you're not sure, it is best to not vary your instalments. Any overpaid instalments will be refunded to you after you lodge your tax return.
• Already missed payments rather than varied? That is a different problem, set out in what happens if you do not pay PAYG instalments.

For tax taken from wages rather than instalments, use the PAYG calculator.

Frequently asked questions

Sources

Fetched 12 October 2026. Every claim on this page traces to the ATO pages and legislation below. The worked example applies the s 45-232 table and the ATO's published GIC rate to assumed figures, which are labelled as such.

• Reinforcing PAYG instalment obligations (QC107973, published 1 September 2026). The letters, who receives them, the GIC reminder, and the reasonable, current and substantiated estimate standard.
• How to vary your PAYG instalments (QC16159, last updated 23 June 2026). The 85% comparison, GIC and possible penalties, refunds after lodgement, the disaster reasonable care position, varying to zero, and the lodgment timing.
• Taxation Administration Act 1953, Schedule 1, section 45-232 (ATO legal database). The acceptable amount table for a varied instalment amount, the daily GIC period, and the 14-day written notice.
• Taxation Administration Act 1953, Schedule 1, section 45-230 (ATO legal database). The equivalent rule where a varied instalment rate is below 85% of the benchmark instalment rate.
• General interest charge rates (QC16145, updated 4 September 2026). The 11.51% annual rate for October to December 2026.
• PS LA 2011/12 Remission of general interest charge. No deduction for GIC incurred on or after 1 July 2025.

Related