PAYG Instalments

So what are PAYG instalments?

As a business owner, you're probably aware of the importance of paying your taxes on time. However, you may not be familiar with PAYG instalments and how they work.

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Recently the ATO stated that accountants need to educate client's on how the PAYG Instalment system works to ensure that client's aren't underpaying their taxes. This article will explain what PAYG instalments are and how they can benefit your business.

Although it may seem frustrating and confusing at first, the fact that you are required to pay PAYG instalments is a sign that your income has reached an amount worthy of registering on the ATO's radar. Congratulations!

It is important to note that PAYG instalments are distinct from PAYG withholding which applies to payments to employees. This difference can be explored in greater detail here.

How do PAYG Instalments work?

Instead of postponing tax payments until the end of the year, PAYG instalments allow you to spread out your tax costs over time.

When you reach the end of the financial year, your earnings will be calculated. If you have paid enough taxes already then great – there won't be anything more to pay! In fact, it's possible that you've even overpaid in which case you're entitled to a refund. On the other hand if it turns out that what was previously paid wasn't sufficient then an extra amount must be added on top.

PAYG instalments can apply to:

• A company;
• You personally, generally if you have income from sources other than wages.

Basically, if any entities earn over a certain threshold, the ATO will notify you that its now time to pay your income tax instalments. The ATO lists these income thresholds on its website here.

When does the ATO issue PAYG instalments?

The ATO will commence delivering PAYG instalment notices when they detect that a person or enterprise has earned more than the income thresholds of the specified sources. This usually happens after the annual tax return has been lodged.

The ATO issues PAYG instalment notices quarterly. If your business is registered for GST, then you’ll pay PAYG instalments as part of your BAS. Otherwise, it will be a standalone payment.

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The PAYG instalments now part of your quarterly activity statement cycle will accumulate towards your end-of-year tax obligations.

How does the ATO calculate the PAYG Instalment tax liability?

If your annual income has reached the ATO's threshold, the ATO will then include a PAYG instalment requirement in your next quarterly activity statement, as either:

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1. a fixed quarterly amount, calculated based on your income from your last tax return

OR

2. a percentage amount using a multiplier that the ATO provides

Most clients prefer option 1, but if you prefer to use the percentage method instead (option 2 above), which can be the better option if your income fluctuates significantly during the year, just let your accountant know and this change can be completed.

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How do I best manage PAYG Instalments?

Ideally, you’ll have put tax aside when the income was earned. If the money is already sitting in a sub-account or included in your working capital calculations, then it will always be there when the instalments are issued.

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As for how much to put aside, this is a case-by-case situation. You can request assistance from your accountant in making these cash-flow calculations.

So are PAYG instalments all that bad?

No one likes paying tax but this system spreads it out during the year, which is usually a better way to manage your cashflow. And we all know how important that is!

For More information

• PAYG income tax instalment [ATO website]

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How we can help?

If you need more advice on this issue, please contact our team.

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