PAYG Instalments is a system where regular payments are made to the ATO to cover your annual tax liability. To be added to the installment system your income from your business and/or income from your investments must be greater than $4000 and the amount due on your most recent Notice of Assesment is greater than $1000.
There are two options to pay the PAYG installment. The first is to pay the amount that the tax office suggests based on a calculation from the previous year’s tax return. The second is to use the percent figure that the ATO suggests multiplied by the installment income for that period. The option I come across most often is the first.
Any instalments paid through the year are part of the tax return calculations and if you have paid too much a refund will be given and conversely, if you haven’t paid enough, a bill will be issued.
You will not be put on the system if your notional tax (Estimate of tax payable in investment and business income calculated by the ATO) is less than $500 or you’re entitled to the seniors and pensioners tax offset.
Once the conditions above are met the ATO will automatically place you on the PAYG instalment system, you will receive a notification soon after you have received the current year’s Notice of Assessment.
Quite often you will know in advance that you will be put on the instalments system when your next tax return is lodged. If this is the case you can request voluntary entry by contacting the ATO. For some, this can be helpful when budgeting for the end of year tax liability.
When contacting the ATO you will need to know an estimate of the amount of tax that will need to be paid, let’s say you calculate $8000 per year in tax then $2000 will need to be paid each quarter which amounts to approximately $155 per week.
Varying the amount you pay
If your income changes from the previous year’s tax return the quarterly PAYG amounts can be varied. The installment rate can be varied both up and down but the majority of variations are down.
If a variation is made, once the tax return has been lodged the ATO will check to make sure that the varied amount is greater than 85% of the tax payable, if it is less than 85%, you may be subject to a general interest charge on the difference.
Frequency of Instalments
The default (Instalment income less than $20 million) for many taxpayers is to be put on a quarterly instalment cycle where 25% of the notional annual amount due is paid quarterly. The first instalment for the financial year is due on the 28th October and the following instalments are due on the 28th February, 28th April and the final instalment on the 28th July.
You can request to pay annually if the notional amount of tax is less than $8000. The date of payment is 31st October after the end of the financial year
There is a two-instalment option, you will be required to pay 75% of your annual PAYG liability by 28 April and the remainder by 28 July, available to some primary producers and special professionals such as sports professionals and authors.
Exiting the PAYG Instalment system
Leaving the PAYG instalment system is in its simplest form the opposite of how the ATO adds you to the system,
- your instalment income is less than $4000
- or the amount of tax due is less than $1000
- the amount of the notional tax is less than $500
- you’re entitled to the seniors and pensioners tax offset
- you lodge a final tax return
- your accountant lodges a ‘further return not necessary’ or you notify the ATO that you don’t have to lodge a return
- or you are deceased.
You can also contact the ATO if your circumstances have changed sufficiently for you not to be on the system, simply wanting to pay the tax at the end of the year and not quarterly isn’t a sufficient reason.