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 pay as you go (PAYG) instalments and how they work. It's important to understand the basics regarding the PAYG Instalment system to ensure that you aren't underpaying your 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.
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. Essentially, PAYG withholding is the amount you pay to the ATO on behalf of your employees as part of their income tax liability, and PAYG instalments relate to your business's expected tax liability. They are instalments made to the ATO periodically throughout the year based on your expected income tax liability.
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 assessable income 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 the amount previously paid wasn't sufficient then an extra amount must be added on top.
PAYG instalments can apply to the following entities business and investment income (excluding GST and any capital gains):
- Company
- You personally (individual), generally if you have income from sources other than wages, for example, business or investment income.
- A trust
- Superannuation fund
Basically, if any entities earn above the PAYG instalment threshold, the ATO will notify you that its now time to pay your income tax instalments. Instalments are paid via the activity statement or instalment notice. Learn more about the ATO's instalment income thresholds on its website.
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 PAYG 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 quarterly instalments as part of your BAS (business activity statement). Otherwise, it will be a standalone payment.
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 payable?
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:
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 business income fluctuates significantly during the year, just let your accountant know and this change can be completed.
What do I do if my PAYG instalment amount seems incorrect?
If you notice a significant in the instalment amount — either much higher or lower than you expected — it's a good idea to check with your accountant to ensure you're paying the correct amount. In the past, we've seen instalment amounts set to nil and some that are much higher than necessary. Paying an amount that's wildly different to what it should be can cause major cash flow issues. For example, if you fail to pay instalments throughout the year, you might be left with a hefty tax bill you weren't expecting once you've lodged your annual income tax return.
It's very simple to vary your instalment amount, but it's important to ensure you're paying an accurate amount each period. If you're unsure of how much you should be paying, please reach out to your accountant.
How do I best manage PAYG Instalments?
Ideally, you'll have put tax aside when the income was earned to cover your estimated tax liability. 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.
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. This will ensure you don't receive a large tax bill when you lodge your tax return.
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 cash flow. And we all know how important that is!
We're here to help
Managing PAYG instalments effectively is crucial for maintaining cash flow and avoiding unexpected tax bills. If you need help understanding your PAYG obligations or adjusting your instalments, we're here to assist. Get in touch with us today to ensure you're on track and making the most of your tax planning.
