PAYG instalments are a way for the Australian Taxation Office (ATO) to collect income tax throughout the year, helping to manage your tax obligations. Rather than paying a large lump sum at the end of the financial year, you make regular payments towards your expected tax liability. Most of the time, you don't really have a choice about this. The ATO enter you into this system and without real cause, you cannot simply decide not to participate.
Calculation of PAYG Instalments:
The ATO calculates the instalment amount based on your previous tax returns and business activity statements (BAS)
They estimate your expected income and tax liability for the current year, then divide this into instalments due across the year. If your tax return is lodged late within the cycle and one or two of the quarters have already passed, the ATO will divide the tax liability into the remaining quarters.
What are the Quarters of the Financial year?
1st July - 30th September
1st October - 31st December
1st January - 31st March
1st April - 30th June
Why Pay PAYG Instalments?
It's a way to ensure that you meet your tax obligations progressively rather than facing a substantial tax bill at the end of the financial year. This system helps in managing cash flow and reduces the financial strain of a large tax payment. No, it is not your decision as to whether or not you want or don't want to participate.
Occurrence and Entry into PAYG Instalment System:
If you're a sole trader or a small business owner and meet the ATO's criteria, you'll be automatically entered into the PAYG instalment system. It generally occurs when you lodge your first income tax return.
What is the criteria to be entered into the payg instalment system?
The Australian Taxation Office (ATO) automatically includes individuals and businesses in the PAYG instalment system based on certain criteria. Here are the primary factors that determine if you'll be entered into the PAYG instalment system:
Previous Tax Liability: If you've previously had a tax liability after considering your income tax return and business activity statements (BAS), the ATO may include you in the PAYG instalment system to collect tax throughout the year.
Income Level: If your income is above a certain threshold, the ATO may consider you eligible for the PAYG instalment system. This threshold can change from year to year and can vary depending on your specific circumstances.
Business Structure: Sole traders, partnerships, trusts, and companies are all potentially eligible for PAYG instalments. The ATO may consider including you based on the structure of your business.
Nature of Business Activities: If your business involves certain types of activities or industries that typically have fluctuating incomes or tax liabilities, the ATO might opt to include you in the PAYG instalment system to manage these variations.
Previous Lodgments and Compliance: Your compliance history, including timely lodgment of tax returns and payments, can influence the ATO's decision to include you in the PAYG instalment system.
Varying PAYG Instalments:
Yes, you can vary your PAYG instalments. If you expect your income or deductions to be significantly different from the ATO's estimate, you can vary the instalment amount. You can do this either up or down.
What if I vary my Payg instalments down too much and then have a tax bill?
If you vary down your instalments too much and end up paying less than your actual tax liability, you might incur a tax shortfall, potentially resulting in penalties or interest charges.
What happens if I don't vary it early enough & the ATO automate the instalment statement.
If you don't vary your instalments early enough and the ATO's system automatically finalises your instalment amount, it means the ATO will consider the original estimated amount as final. This could lead to overpayment or underpayment of taxes. If you are late then in paying it, you may incur penalties and interest. Just because you don't "accept it" or "lodge it" does not mean that the debt is not due. Once the due date for lodgement falls due, if you haven't actually "finalised it" the ATO will do this for you. Thus, creating the debt anyway.
When are my payg instalments due for lodgement and payment?
Quarter 1 (July to September): Payment Due Date: October 28th
Quarter 2 (October to December):
Payment Due Date: February 28th
Quarter 3 (January to March): Payment Due Date: April 28th
Quarter 4 (April to June): Payment Due Date: July 28th
How do I know what my payg instalments are?
The ATO communicates PAYG instalment information through your myGov account. They send notifications and reminders about due dates for payments, variations, or if there are changes to your instalment amounts.
Keeping an eye on your myGov account is crucial to stay updated with PAYG instalment-related information and deadlines.
Understanding PAYG instalments is vital for managing your tax obligations as a sole trader or small business owner in Australia. If you have specific circumstances or need to make variations, it's always recommended to consult with a tax professional or the ATO directly for tailored advice.
This articles intention is to inform rather than advise and is based on legislation at the time. Each Taxpayer’s circumstances vary so we strongly recommend that you discuss this information with your Tax Agent, Accountant or Bas Agent before implementation. If you take, or do not take action as a result of reading this article, we accept no responsibility for any financial loss incurred. This is general advice only.