Pay as you go (PAYG) instalments are imposed by the ATO as a system for regular payments towards your expected annual income tax liability. It applies when you earn business or investment income over a certain amount.
The Tax Office will notify you, or your tax accountant on your behalf, if you need to start paying by instalments under the PAYG instalment system.
As an individual or sole trader, from 1 July 2015, if you have a myGov account linked to the Tax Office, you can view, lodge, pay, vary and manage all of your PAYG instalment obligations online.
Who needs to pay PAYG instalments?
The Tax Office determines whether you need to be in the PAYG instalments system based on information reported in your latest tax return.
For example, if you earn bank interest, you ,may be given an instalment rate to pay instalments.
For individuals and trusts, you will typically need to pay instalments if you reported $4,000 or more ($1 or more if you’re not a resident) of gross business or investment income in your latest tax return unless one of the following applies:
the tax payable on your latest notice of assessment is less than $1,000
your notional* tax is less than $500
or you are entitled to the Seniors and Pensioners Tax Offset.
*Notional tax is an estimate of tax payable, excluding capital gains tax.
How is it paid?
There are two ways to pay instalments. The ATO will automatically add you to the PAYG instalments system when you lodge your first tax return with business or investment income above the threshold.
Alternatively, you can request to enter the system early and pay voluntary instalments to reduce the chances of having to pay a large amount at the end of the year (which can be an idea to consider if, for example, you are newly introduced to business).
How much is paid?
Most instalment payers can choose between two options to calculate how much to pay —an instalment amount or an instalment rate. If you’re eligible to choose, this will be shown on your first activity statement or instalment notice.
The “instalment amount” option is available to all individuals and most businesses. However, companies and super funds with business or investment income of $2 million or more do not have this option unless they are annual payers.
The Tax Office will calculate instalment amounts from previously reported information. It adjusts these figures to account for likely growth in your business or investment income (the growth factor is based on Gross Domestic Product).
The “instalment rate” option allows you to work out the amount yourself using the Tax Office instalment rate. All taxpayers can use this option. You must use it if you’re a company or super fund that has reported $2 million or more of gross business or investment income in your most recent tax return and are not currently a “small business entity”.
The main advantage of the second option is that your instalments are based on your income as you earn it instead of a projection based on your previous tax situation. This helps with cash flow management because your tax obligations are more closely aligned with income fluctuations. For example, if your income in a quarter is zero, the amount to pay for that quarter is zero.
With this option, you pay a proportion of your business or investment income (your instalment income) for the quarter or income year just gone.
There are some instances where the Tax Office will allow you to vary your instalment rate to manage your cash flow. Please contact our office for further information.
