PAYG Instalments (Pay As You Go Instalments) is a system requiring certain Australian taxpayers to make regular payments towards their expected income tax liability for the current financial year. This system helps individuals and businesses manage their cash flow by spreading their tax payments throughout the year rather than paying a lump sum at the end of the financial year.
But while the PAYG instalment system aims to simplify things, understanding how it works can be confusing if you’re a new business owner or investor.
So, you may have questions.
This blog will address some of the most frequently asked questions about PAYG withholding instalments, including who needs to make them, how to calculate them, and how they can affect your tax obligations.
1. How Do I Know When to Pay PAYG Instalments on my Business and Investment Income?
Suppose you’re a sole trader or a member of a partnership. In that case, you’re required to pay PAYG Instalments if:
- Your business and investment instalment income (not including any salary or wages you earn as an employee) is more than $4,000 for the previous financial year;
- You estimate your notional tax to be $500 more; and
- Your latest tax assessment is $1,000 or more.
If you’re a company, you’ll generally need to pay PAYG Instalments if your instalment income totalled at least $2 million on your latest tax return or if you estimate your notional tax to be $500 more.
The Australian Taxation Office will notify you if you need to start making PAYG Instalments. But, if you’re unsure whether to make PAYG Instalments, you can contact them directly or speak with a tax accountant.
2. How Much Will My Instalments Cost Me?
The ATO calculates the instalment amount you must pay using a formula that considers the information from your most recently lodged tax return. This calculation results in a notional tax amount, which estimates the income tax you’re expected to pay for the current financial year based on your business and investment income.
Another option is to calculate your PAYG Instalments based on an instalment rate provided by the ATO. This method is called the instalment rate method, and it allows you to calculate your instalment rate based on your most recent business and investment income.
The main advantage of this method is that you pay your PAYG instalments on your income as you earn it instead of a projection based on your previous tax situation.
3. When Do I Have to Pay My PAYG Tax Instalments?
They are generally due every quarter; however, you can elect to pay the PAYG instalments monthly if you’d prefer.
Monthly instalments are due on the 21st of every month, and quarterly instalments are due on the following dates:
|July – September
|October – December
|January – March
|April – June
In some instances, if you don’t wish you pay quarterly instalments, the ATO will allow you to choose to pay your instalments twice a year; however, there are certain conditions you have to meet, including the following:
- You carry out a primary production business, or you operate under a specific profession such as a performing artist, sportsperson or, among other things, an author
- Your most recent tax assessment notice amounted to less than $8,000
- You’re a sole trader or partner in a partnership and don’t need to pay Goods and Services Tax (because you generate income below the GST threshold)
- You run your business as a company, but it’s not a partner in a GST joint venture, a member of an instalment group, or a consolidated group head company.
If you meet the eligibility criteria, your PAYG instalment amount will be due on the 28 April and 28 July each year.
4. What is the Difference Between PAYG Instalments and PAYG Withholding?
While PAYG instalment is a system that relates to tax on business income, PAYG withholding is a system that requires employers to withhold a certain amount of tax from an individual’s salary, wages, or other types of income and send it to the ATO on their behalf.
The ATO calculates the withheld amount on the individual’s income and tax status.
Both PAYG systems aim to help business individuals meet their income tax liability throughout the year rather than paying a large annual instalment at the end of the financial year.
5. Is it Possible to Overpay my PAYG Instalments?
Yes, overpaying your PAYG Instalment amount is possible – especially when you make installments according to the ATO formula that estimates your liability according to your last tax return or estimated income for the year.
If you overpay your PAYG Instalments, you can claim a refund of the excess amount when you lodge your income tax return for the financial year. The ATO will credit the excess amount, which you can use to offset any other outstanding tax debts.
The ATO will recalculate your liability in these instances, so you don’t overpay in the next quarter.
6. How Do I Pay My Instalment?
There are several ways to pay your PAYG Instalments in Australia, including:
- Online: You can pay through the ATO’s online services using a credit or debit card or by linking a bank account. To do this, you’ll need to create an account with the ATO’s online services, giving you access to a range of online tax and superannuation services.
- Mail: You can pay your PAYG Instalments by mail using a cheque or money order, along with the payment slip provided on your instalment notice.
- Through your accountant or BAS agent: If you have an accountant or BAS agent, they can assist you with making your PAYG Instalment payments on your behalf. They can also help you determine the correct payment amount and ensure you make it on time.
It’s worth noting that the ATO will send a reminder notice to pay your PAYG Instalment one month before the due date. This reminder notice will include the amount you must pay, the due date, and the available payment methods.
7. What if I Can’t Afford my PAYG Instalment?
If you cannot pay your instalment in full by the due date, you can apply for a payment arrangement with the ATO. This will allow you to pay your debt in instalments over a period of time, but interest charges may apply.
If you struggle to manage your finances or are unsure how to address your PAYG Instalment obligations, you may benefit from seeking professional advice from a financial counsellor, accountant, or business advisor.
PAYG Instalments are a crucial part of the Australian tax system that helps individuals and businesses stay on top of their tax obligations throughout the year. Knowing how PAYG Instalments work when they are due and how much they will cost you will help you better manage your tax liabilities.
If you need assistance with your PAYG Instalments or other tax and accounting matters, KNS Business Advisors and Accountants can help. Our team of experienced professionals can provide tailored advice and solutions to help you manage your tax obligations and improve your financial performance.
To learn more about our services, contact us today to schedule a consultation. Let us help you take the stress out of tax and accounting, so you can focus on growing your business or managing your investments.