Pay as you go (PAYG) instalments is a system for making regular payments towards your expected annual income tax liability. It only applies to you if you earn business and/or investment income over a certain amount.
The Tax Office will notify you, or us 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 will be able to view, lodge, pay, vary and manage all your PAYG instalment obligations online.
But who needs to pay PAYG, how is it paid and how much?
Who needs to pay PAYG instalments?
The Tax Office decides whether you need to be in the PAYG instalments system based on information reported in your latest tax return.
An example of this may be interest from the bank. If you are required to pay instalments you are generally given an instalment rate.
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 and/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
- you are entitled to the Seniors and Pensioners Tax Offset.
*Notional tax is an estimate of the tax payable, excluding capital gains tax.
How is PAYG paid?
There are two ways to start paying instalments. You will automatically enter the PAYG instalments system when you lodge your first tax return that has business and/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 new to business).
How much PAYG 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 and/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 information that has been previously reported. It adjusts these figures to take into account likely growth in your business and/or investment income (which is based on Gross Domestic Product).
The “instalment rate” option is where you can work out the amount yourself using the instalment rate the Tax Office provides. All taxpayers can use this option and you must use it if you’re a company or super fund that has reported $2 million or more of gross business and/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 fluctuations in your income. 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 and/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 help manage your cash flow. Talk to us for more information.