I Have Debt? All You Need To Know About PAYG Instalments Before Tax Time

Whether you run your own business or earn investment income, planning for your income tax is important to help you keep a healthy cash flow. How many times has it come to tax time only for your accountant to inform you of the dreaded amount of tax you owe in one lump sum?

If you are anything like us it can come as a bit of a shock, especially if you have access to capital to pay it off in one go at tax time. Pay as you go (PAYG) instalments can help you reduce this shock factor at tax time by paying your tax in advance throughout the year.

What does PAYG stand for?

 PAYG or Pay as You Go is a system designed by the ATO to help business entities and individuals who in previous financial years have been assessed a tax payable to instead of pay 1 large sum to make regular payments throughout the year.

Why have you entered into PAYG Instalments?

The ATO works out whether you need to pay PAYG instalments based on the information you reported in your last tax return. We’ve broken down below the different thresholds for the ATO entering you into PAYG:

To be clear, PAYG instalments do not reduce your total tax bill, only your income reducing can dictate the amount of income tax you will pay. But, by making regular PAYG instalments throughout the year, you will reduce that shock factor come tax time when you go to lodge your income tax return.

So, how are PAYG instalments calculated?

Payments are based on your business and/or investment income from your most recently lodged tax return and by applying current income tax rates to it. The ATO allows you to 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 the ATO has calculated for you based on your latest tax return.
  • Option 2 Instalment rate – you work out your instalment amount using    
    • an instalment rate the ATO provide
    • your instalment income.

I’m still not convinced. How does this help my business?

If 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 cash flow, and you won’t have to pay a large tax bill when you lodge your tax return.

This allows you to plan ahead so you can pay the right amount at the right time, allowing you to pay small increments of debt throughout the year.

Are PAYG instalments compulsory?

Yes and No, if you had a payable tax amount in the last financial year and are expected to produce a similar return then you must stay on the PAYG system, the ATO will automatically remove you from the PAYG instalment system when they assess you no longer have to pay. There are a few situations on when this would apply:

  • If you an individual with an estimated tax liability of less than $500
  • you had a tax debt of less than $1000
  • you became entitled to and claimed the senior and pensioners tax offset
  • and more situations which you can find here.

When are PAYG due?

PAYG is due each quarter of the financial year.

For more information talk to one of our expert taxation accountants to help you navigate the ATO and PAYG instalments ready for tax time.

Email: advisor@locmansadvisors.com

Ph: (03) 8393 1450