It’s well known that whether you have an income from your business or an investment, you are obligated to pay your taxes. Tax liability is processed at the end of every year. The ‘pay as you go’ (PAYG) system helps you manage your income tax payments and makes documenting a lot easier.
How Does PAYG Work
PAYG instalments is a system established by the Australian Tax Office (ATO) that gives you the opportunity of making regular payments throughout the year towards your expected tax liability on your business or investment income.
You enter this system automatically when your income is over the tax threshold, which ATO also establishes. When this happens, the ATO will contact you and notify you of any further obligations.
The instalment rates you’re issued with are based on your most recent income tax return. When you lodge your tax return, all the payments made during the year are credited against the assessment in order to determine if you owe more tax or if you should get a refund.
If you want to make sure your tax assessment includes the payments you made throughout the past year, you’ll need to pay them before you lodge your tax return. The payments are usually quarterly.
PAYG helps you plan ahead and manage your tax payments better. These regular payments are very helpful because you won’t end up paying a huge tax bill when you lodge your income tax return.
How Are Instalments Calculated
The simplest way to go is paying by the instalment amount. The ATO calculates the amount you need to pay in your instalment, based on the information you provided in your latest tax return.
Remember that choosing this payment option can only be done as late as the due date of your first instalment rate of that year. It’s the only way it can stand for the rest of the financial year.
Another option for payment is using the instalment rate - which is something you have to do yourself by using the instalment rate the ATO provides for your instalment income. Instead of making projections derived from your tax history, this allows you to base your instalments on your income as you earn it.
If your income significantly changes throughout the year, this is the choice you should go with.
The ATO provides a PAYG calculator to help you work out your instalment amount or rate for the current financial year. All you need to do is enter your estimated income and expenses, and the calculator provides you with an instalment amount or rate based on the information you entered.
You also have the option of changing an instalment if you are convinced that the instalment amount will not match the expected tax liability for the year, resulting in paying less or more.
However, varying your instalment can lead to you being charged with interest or penalties, if your changed instalments are very low. This is why you need to be careful and vary your instalment amount correctly.
If you chose to pay your instalments using the instalment amount calculated by the ATO, you should avoid changing your instalment amount regularly. If your income fluctuates over the year and you want to change the instalment amount regularly, you should choose the option of paying by instalment rate where you calculate the amount yourself.
Who is The PAYG Instalments System For?
The PAYG instalment system applies to tax-paying entities, such as individuals, companies, and superannuation funds.
These instalments are usually paid quarterly, but the ATO can accept annual payments from individuals if their most recent annual tax liability on their business or investment income is less than $8,000, and some other conditions are met.
Companies with an annual turnover above a certain threshold are required to pay their PAYG instalments monthly. The companies with a turnover below the threshold are required to pay their instalments quarterly. Companies also can pay annually, but they need to meet the same criteria as individuals, described in the previous paragraph.
Superannuation funds are required to pay their PAYG instalments quarterly. The annual instalment option is also available for superannuation funds if they meet the same criteria for individual taxpayers.
Voluntary Entry Into The PAYG Instalments System
Besides the automatic entry in the PAYG instalments system, when you lodge a tax return with income above the threshold, there is also an option for voluntary entry into the system.
This is a good idea if you’re new to business or you believe you’ll make a profit from your business or investment. The first thing you need to do is request to enter the system using a MyGov account linked to the ATO. Afterward, you need to make an estimation of your yearly income and calculate the tax deduction for that income. Finally, divide it into quarters so you’ll know how much you’ll have to pay when you start receiving your installments.
If you’re still finding the PAYG system puzzling, no need to worry!
Reach out for any information or assistance at CAPTaxation. We’re here to help you with your instalment calculations and payments!