PAYG Installments and benefits of having them
Pay as you go (PAYG) instalments assist with planning ahead for your income tax. By making regular payments (instalments) throughout the year you won't have to pay a large tax bill when you lodge your tax return. PAYG payments are made based on your business and/or investment income (which is also known as instalment income). When you lodge your tax return, all the amounts you've paid during the year will be offset against any tax you owe for the year.
PAYG instalments are different to PAYG withholding. With PAYG withholding, employers collect tax from the payments they make to employees and contractors and send it to the ATO. This helps those people meet their own income tax liabilities.
Interpreting the ATO’s technical jargon
Estimated or Notional Tax
The ATO estimate your tax by taking the business and/or investment income reported on your most recently lodged tax return and applying the current income tax rates to it. The ATO excludes net capital gains from your income except if you are a superannuation fund or self-managed superfund.
Instalment amount
An installment amount is that amount based on your most recent tax return and includes an adjustment based on likely changes in the economy.
Instalment income
Instalment income is the business and/or investment income reported on your last tax return, excluding any statutory income (income that's assessable because of tax law, for example, capital gains). Find out what items are included in instalment income
Instalment rate
An instalment rate is the percentage figure you use to work out how much you need to pay. It helps to make sure the total instalments you pay are as close as possible to the tax that will be payable on your business and/or investment income once you lodge your tax return for the year.
Why do business’s or investments enter PAYG instalments
The ATO work out whether you need to pay PAYG instalments based on the information you reported in your latest tax return.
The following tables outline reasons why you may have entered PAYG instalments.
Table 1: Individuals and Trusts
Table 2: Companies and Superfunds
If you need to pay your income tax by installments, the Australian Tax Office will let you know. There are different methods you can use to work out how much you will need to pay and how often you will need to lodge and pay. Before each instalment is due the ATO will send an activity statement or instalment notice to let you know when your payment is due and how much to pay.
How to start paying PAYG instalments voluntarily
If you're new to business, or you think you're going to make a profit from your business or investment income, it’s a good idea to voluntarily enter into the PAYG instalments system. This will help you budget for next years’ income tax, smooth out your cashflow, and you won’t have to pay a large tax bill when you lodge your tax return.
You can use the PAYG instalments calculator to work out whether you should enter and how much you'll need to pay.
Communication
The ATO will contact you depending on how you interact with them. If you are registered for mygov External Link and linked your account to the ATO, the ATO will send out communications to your myGov Inbox. You will receive an email or SMS to let you know when an item is available in your myGov Inbox. Alternatively, if you use the Business Portal or Standard Business Reporting (SBR)-enabled software and if the ATO has your email address. Communication is sent via an email with your instalment amount 21 days before the due date.
Finally, if you receive paper mail from the ATO they will send your communications to the address we send your income tax correspondence. If you wish for your activity statements or instalment notices sent to a different postal address, please contact the ATO.
Making payments
When you are reporting and making payments, you may need to know about:
Calculating your PAYG instalments
Generally, you can choose from two options to work out how much to pay:
Option 1 Instalment amount – the simplest option as you pay the instalment amount that we have calculated for you based on your latest tax return.
Option 2 Instalment rate – you work out your instalment amount using
an instalment rate we provide
your instalment income.
Option 2 is best if your instalment income changes regularly, because you will apply the rate to your income in each period.
If you’re eligible to choose between these options, they will both be shown on your activity statement or instalment notice. You'll need to choose one when you lodge and keep using that option for the rest of the financial year. You can change to the other option on your first activity statement of the next financial year.
Reporting and paying your PAYG instalments
The ATO has a How to complete your activity statement page which help explains how to fill out your activity statement or instalment notice.
There are special rules for reporting and paying PAYG instalments for:
Changing the amount you pay
If your circumstances change and you think the instalment amount or rate we have worked out will mean you'll pay too much or too little tax, you can:
vary your PAYG instalments on your current activity statement
lodge a revised activity statement.
Managing your instalments online
If you’re an individual (including if you're in business as a sole trader), the easiest way to manage your PAYG instalments is by using our online services. You can view, lodge, pay, vary and manage all your PAYG instalment obligations in one place. All you need is a myGov account linked to the ATO.
You can also use the Business Portal to revise, print and list previous activity statements, check accounts, update business registration details and send secure messages.
Stopping your PAYG instalments
The ATO will automatically remove you from the PAYG instalments system when you no longer have to pay instalments. If you think you no longer need to pre-pay your income tax using PAYG instalments, you may be able to exit the system.
If your circumstances change after you have exited the system, and you expect to earn over the threshold amount or you want to plan ahead and budget again for your income tax, you can re-enter.
You can find out more about stopping your PAYG instalments here.
we are here to help
The best way to be certain of how to use PAYG instalments or if this method is right for you and your business is to speak with an Evolution Adviser who will keep you on the right track.
Source: Australian Taxation Office, November 2020