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PAYG Instalments - A Quick Rundown

The ATO introduced the Pay As You Go (PAYG) system with the purpose to make tax time a little easier and leave businesses in a better position to manage their cashflow. It is where parts of a future liability is paid in advance, which means there is less to pay the ATO at the end of financial year. There are two types of PAYG - instalment and withholding.

  • PAYG Instalment (PAYGI) is a pre-payment for taxpayers who receive business & investment income above the ATO's entry thresholds.
  • PAYG Withholding (PAYGW) is a pre-payment on behalf of your employees for their personal income tax obligations.

Here I’ll be taking you through PAYG Instalments.

Contents

PAYG Instalments – What are they?

PAYG Instalments are regular tax prepayments towards a taxpayer’s expected income tax liability, due to their business and investment income.

PAYG Instalments paid during the year are credited against your income tax liability when your tax return is lodged.

In general, the purpose of the PAYG Instalments System is to ensure the efficient collection of income tax and to avoid instances of taxpayers paying large tax bills after lodgement of their tax returns (i.e. paying their entire income tax all at once after lodgement).

By prepaying your income tax throughout the year, you are reducing the amount of income tax payable when lodging your tax return.

When am I required to pay PAYG Instalments?

Taxpayers are automatically entered into the PAYG Instalments System if their instalment income (business and investment income, excluding GST and any capital gains) is above the ATO’s entry thresholds.

Individuals (including sole traders) are automatically entered into the PAYG Instalments System if they have all of the following:

  • Instalment income of $4,000 or more from your latest tax return lodged
  • Tax payable on your latest notice of assessment of $1,000 or more
  • Estimated (notional) tax of $500 or more

Companies and super funds are automatically entered into the PAYG Instalments System if any of the following apply:

  • Instalment income of $2 million or more from your most recent tax return lodged
  • Estimated (notional) tax of $500
  • If the entity is the head company of a consolidated group

The ATO will issue a letter to taxpayers when they have been enrolled into the PAYG Instalments System.

Voluntary registration to the PAYG Instalments System is available.

How are PAYG Instalments calculated?

PAYG Instalments are calculated by the ATO based on a formula using the information from your most recent tax return lodged.

There is also another option to calculate your PAYG Instalments based on an instalment rate provided by the ATO.

You may be able to vary your PAYG Instalments if your total PAYG Instalments will be more, or less than your expected tax for the year (i.e. if your financial situation or circumstances have changed). Please note that varying your PAYG Instalments too low may result in interest charges and/or penalties.

Also, please note that the lodgement of subsequent tax returns will result in a change to your PAYG Instalments. The ATO will recalculate your PAYG Instalments based on the subsequent tax return lodged (most recent tax return lodged).

When are PAYG Instalments due?

Most taxpayers pay their PAYG Instalments quarterly. Businesses with instalment incomes of more than $20 million are required to lodge and pay their PAYG instalments monthly.

Depending on your circumstances (i.e. an individual carrying on a primary production business or a special professional according to the ATO), the ATO may offer an option to pay 2 instalments per year or one annual instalment.

The ATO will issue your PAYG Instalments via your Business Activity Statement (for those who lodge BASs) or an Instalment Activity Statement at the end of each quarter.

For most taxpayers (quarterly PAYG Instalment cycle), the due date for quarterly PAYG Instalments is generally 28 days after the end of the quarter. Please see below the ATO’s due dates for quarterly instalments (in a standard income year).

Due dates for quarterly instalments
(standard income year)

Quarter Period Due Date
1 July - September 28 October
2 October - December 28 February
3 January - March 28 April
4 April - June 28 July

 

If you would like help with PAYG or have other business matters you would like to discuss please make sure you talk with us about your situation. BLG Business Advisers are Wollongong Accountants who service all across Australia, so our team are always available to guide you and will provide solutions that are specific to your needs.

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*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is correct at the time of publishing and is subject to change*
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