confusing letter (and invoice) from ATO

:confused:Hi All,

I've received a notice from the ATO after lodging my 08/09 tax return which has left me very confused.

The notice said, that according to my 08/09 tax return, I have 'business/investment income which now requires me to pay quarterly PAYG installments'. Based on their assessment, they calculated that I had earned $9000 from rental income and interest on term deposits, and as a result, they will be requiring me to pay the annual equivalent of 41% to the tax office in PAYG installment, this is a total of approx $4,000, in $1,000 quarterly installments :confused:

Now, to set the scene, I have worked for the same employer for 7 years and I pay my PAYG tax fortnighly, it automatically gets taken out of my pay, as it would be for most people I imagine. The only investment property in my name is a unit I have with my partner (50/50) which in recent years has become positively geared. I understand that I have accrued $9000 from rental + term deposit interest, but what I don't understand is why isn't this just added to my taxable income when I do my tax return at the end of financial year, as it always has? The tax rate I pay on my taxable income is far less than 41%, why are they requiring I do it this way?

To make it more confusing, our investment property is now negatively geared, so the installments they are asking me to pay based on last year's interest earnings are totally wrong. I will be getting close to 0 from rental or interest on term deposits in the coming year.

Can any of you savvy investors / accountants / financially knowledgable people enlighten me???? :confused:

Thankyou! :)
 
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Probably best to ask your accountant Mez. Like the letter says, you've been put on the PAYG system.

You can apply to have the instalments varied down to nil. However, if in fact you should be paying instalments and you vary to nil, there may be penalties.
 
Mez,

The letter didn't say something like "Please make payable to <enter nigerian scammer account here>" by any chance?

The Y-man
 
Thanks bene313, I asked my accountant when I first received it, and he said we would process my 09/10 tax return and see what they come back with based on that, but it seems I may not have time, as my first installment is due July 31st. I will give a call however and ask what my options are.

Y-man, I wish it was some silly scam, but unfortunately it looks pretty legitimate :(
 
Mez - if you are sure you will have no investment income for 2010, you can ask you accountant to vary the statement to nil. Otherwise just pay it and you'll receive a credit in your 2010 return for the amount paid.
 
HI Mez,

You could also try calling/contacting the ATO and try to clear up any misunderstanding about the PAYG you think you should not be eligible to pay directly with them.

Or you could do as I once did and ignore the ATO PAYG letter(s) (several actually) and hope your accountant can clear it up when you go and see them. I would not advise doing this, but it is an option :eek:
 
Thanks shiftyphil for that info, I tried looking at the ATO website and couldn't get past the overview - silly me didn't see the detailed menu on the right hand side :rolleyes:

That makes a lot more sense now, bene313 I think I will ask my accountant to assess my current situation (which wont change within the next 12 months) and see whether we can reduce the quarterly payments to nil or at least a lesser amount if we need to be precautious.

I couldn't find any info though on the tax rate of 41% they are using - does anyone know if this is a blanket rate that they tax ALL business / investment income? Or can I apply my tax rate which applies to my taxable income?

Jonril your suggestion sounds very tempting, but unfortunately my accountant receives the installment notices first then mails them directly to me, so I can't claim ignorance :p

I think I might actually give the ATO a call myself though, would be good to get the correct info from the horse's mouth!
 
This is normally something reserved especially for the self employed (because we're special and they don't want us holding their money). It normally gets paid along with GST via BAS statements.

I would imagine that it'll be easy enough to get it varied to your actual tax rate. The ATO likes to get as much out of you upfront and owe you a refund. Personally I prefer it the other way around.
 
The ATO likes to get as much out of you upfront and owe you a refund. Personally I prefer it the other way around.

Or another way of looking at it is, PAYG Instalments are the ATO's version of our 'PAYG Withholding Variation'. ;)

People who have negatively geared investments and expect a large refund, can apply to pay less tax during the year from their salary rather than wait for the end of the year to get a big refund. The ATO does the same for those with investments (such as interest, dividends, positively geared property, business income etc.) who have to pay at the end of the year. Rather than wait until the end of the year, the ATO wants it in instalments during the year.

If they scrapped PAYG Instalments, then they'd probably also scrap PAYG Wittholding Variations. We can't have our cake and eat it too. :)

Mez, as others have suggested, talk to your accountant and they may be able to vary the amount.
 
As already mentioned you can vary the amount paid.

We get a few different forms some you can vary easily and some they simply want you to pay the amount they nominate.

I don't have a form at hand at the moment but I think even with those that they preprint the amount there is a variation section. Just be sure that the variation is correct and that you pay them enough based on the final eoy figure otherwise they can penalise you.

As mentioned if unsure speak to your accountant.
Cheers
 
For many years I had to do quarterly tax payments because of my investment income.

Once "extra income" over and above the salary subject to PAYG tax is received, you then go on to instalments.

When you lodge your tax return this is taken into account.

Unless you expect your investment income to decline (hardly a cheerful prospect) then the figure the ATO gives will be quite accurate.

From what you say it seems like normal procedure.
Marg
 
As everyone else has suggested, the PAYG Instalment amount can be varied. If you have a good read over the IAS form, you'll understand how to vary the instalment.

The instalment amount you've been asked to pay is calculated on the rental property "net income", and the interest received from term deposits shown in your last lodged tax return. The ATO assumes this investment income will increase by a certain % each year. Your instalment amount is based on the ATO calculated notional income for the next financial year.
As soon as you lodge your next return, this instalment amount will be recalculated by the ATO, and maybe you'll be removed from having to pay instalments
Can I ask what happened to your rental property? You said it was positively geared, but is now negatively geared.
 
Thankyou everyone for your helpful replies, it has definitley helped cleared things up, and like many of you, I would prefer to only pay the amount I need to as opposed getting a massive refund cheque, as we are currently renovating our PPOR and any extra $$$ I could use right now!!!

I will speak to my accountant and vary the amount to a more reasonable figure based on my current situation.

PHF, to answer your question, my partner and I have an investment property with a loan of 260k, as of last year we paid it down to 45k (very stupid I know, we knew NOTHING about negative gearing and the repercussions of paying down IP's so much, which is why I joined this clever forum!!!). We were getting approx $1,100 rent per month, and only paying $250 interest per month, hence all the investment income!!!

Early this year we took out all of our redraw (215k) and put it towards other investments (shares), meaning we now owe the full amount of 260k on the IP and pay more interest than what we get in rent.

Since early this year, we have sold our shares (before the massive drop!) and now used this money to buy at PPOR. So I now have no term deposits, no shares, and no positively geared property, which makes me assume I won't need to pay anymore PAYG installments (hopefully!) :)

Thankyou again for taking the time to help out a young and still inexperienced investor!!!!

Cheers
 
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Early this year we took out all of our redraw (215k) and put it towards other investments (shares), meaning we now owe the full amount of 260k on the IP and pay more interest than what we get in rent.

Since early this year, we have sold our shares (before the massive drop!) and now used this money to buy at PPOR.

By doing that, you made your redraw non-deductible.
 
By doing that, you made your redraw non-deductible.

Our accountant advised us that the redraw only becomes non-deductible when it is put towards a non income generating/non investment purpose. All of the redraw was invested in the share market, which we have been told is essentially the same as if it were used to purchase another investment property i.e. it is still being used to purchase an investment / used for an income generating purpose.
 
Yes that is correct.

But our accountant advised us that the issue of concern is what the redraw is used for i.e. the redraw was used to buy shares, making it a tax deductible purpose, and what you do with the shares now or in 20 years is not linked back to the investment loan, I was told it was only the correlation of direct purpose of the investment redraw that mattered.

I am only going by the advice I have been given, he is a chartered accountant working in the industry for 30 years, and I told him I want to sleep at night and have no interest in risks associated with dodgy business, but he assures me it's all perfectly legitimate....

If there is an issue down the track, I think I'd just sell, I'd rather fork out the capital gains instead of wearing a massive tax bill every quarter.
 
Mez, if I were you I would be double checking your circumstance with your accountant.

My opinion is that the interest is not dedctible because you redirected the use of the borrowed funds.

http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001

From the ruling:

14. Where borrowed money applied to a particular use is recouped and redirected to another use, it is necessary to examine that new application of those borrowed funds in considering the deductibility of interest.

Otherwise, when purchasing a PPOR, we'd all be doing what you have done.
 
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