Two of the more common queries we get at Oceans Accounting are “what exactly are PAYG instalments?” and “How do they work?”

So, Holly has written this general overview for you to provide a clearer understanding of PAYG-I, and allow you to make the appropriate choice around how to calculate your respective PAYG-I payment amounts.

WHAT?

• A PAYG instalment is a prepaid income tax instalment that is typically made each quarter during the financial year, for the expected EOFY tax liability.
• These instalments can be made via the quarterly Instalment Activity Statement (IAS) or Business Activity Statement (BAS).

WHY?

• To give some context as to how PAYG-I can initially be overlooked – typically, when an individual is an employee, the employing entity will withhold an amount of tax each pay run and remit this to the ATO on individual’s behalf, and ideally, at tax time, the individual will lodge a tax return and seek a refund of any potential “extra” PAYG that was withheld by the employer and remitted to the ATO on the individual’s behalf during the year.
• As a self-employed individual (sole trader, partnership, or within a company), this needs to be managed by the business owner (you may do this in conjunction with your accountant/tax agent’s advice).
• It can be common for people in the first year(s) of business, after exiting an employment role, to give little thought to setting funds aside for income tax, until they connect with a tax agent for the first time and get an unexpected tax liability when lodging their first business tax return.
• Which is one of the reasons why we have created this blog post, we hope to educate and alleviate any tax related angst for business owners.

HOW?

• Once the business lodges their first tax return that has an amount of income tax payable over $1,000 (broad indicator, of several used by ATO), then the ATO will be expected to enter you/your company into the PAYG instalment system automatically.
• When the ATO do this, they will send you/your company a letter or online notification to make you aware of this change, and will let you know what the next steps are.
• Then, once the next financial quarter rolls around, you can be expected to receive a request for payment from the ATO for the quarterly PAYG instalment.
• The payments are typically made via the quarterly Business Activity Statement (for GST registered businesses) or via an Instalment Activity Statement (for non GST registered businesses).
• Alternatively, you may choose to enter into the PAYG instalment system voluntarily, and this can be done via contacting the ATO directly via phone, through MyGov or Online Services for Business or through your registered tax agent.

HOW MUCH DO I PAY?

• The ATO will set for you/your company a flat quarterly amount to remit, they will base this (for the current financial year) on your business’ most recent tax return lodgement’s rate of tax applied and income booked (generally, for the financial year prior).
• If you are entering the PAYG system voluntarily, you will be asked to provide an estimate of your annual business income, so the PAYG instalment amount can be generated.
• This link to the ATO PAYG instalment calculator can be a great tool to utilise for obtaining an estimate of how much to remit for your PAYG-I each quarter too.

HOW TO VARY INSTALMENT AMOUNTS?

• You can vary this flat quarterly amount set by the ATO by taking your actual instalment income earned during the respective quarter and multiplying this by the instalment rate (provided by the ATO).
• The benefit of this is, you will be paying an instalment that is based on actual income as it is earned, rather than a flat $ amount based on a prior year taxable income/tax return lodgement.
• This variation can be made online via MyGov, Online Services for Business or via your registered tax agent at time of lodging the quarterly IAS or BAS.

WHEN?

• As mentioned, the quarterly instalments will form part of the quarterly IAS or BAS.
• The due dates for a quarterly BAS or IAS are generally 28 days past the respective quarter end. Those being, 28 January, 28 April, 28 July and 28 October.
• However, if you are on a registered tax/bas agent’s list, you may be able to access the lodgement extensions, which can be approx. an extra 25 – 30 days beyond the above mentioned dates, depending on the quarter.

HOW CAN OCEANS ACCOUNTING HELP?

• Oceans Accounting advises their monthly & quarterly accounting package clients at quarterly intervals throughout the financial year of their respective income tax estimates to ensure sufficient funds are being held aside for income tax obligations.
• Oceans Accounting can calculate a relevant PAYG instalment for you/your business to make in any one quarter
• Oceans Accounting also provides EOFY tax planning advice to help alleviate the tax burden at year end. We typically do this around April/May so we have at least 9 months of financials for the current financial year available, and allows enough time to implement before 30 June.

We sure hope this helps to demystify the process of PAYG instalments!