If you are registered for PAYG Instalments, its a sign of profitability and that the ATO wants you to pay your tax upfront in instalments.
Pay As You Go (PAYG) instalments is a system that allows taxpayers to pay their income tax in regular instalments throughout the year, rather than as a lump sum at the end of the financial year. The purpose of PAYG instalments is to help taxpayers manage their tax obligations and avoid a large tax bill at the end of the financial year.
PAYG instalments is typically used by individuals and businesses that are not eligible to have their income tax withheld by an employer (PAYG withholding) or those whose income tax liability is expected to be higher than their withholding credits.
When registered for PAYG instalments, the Australian Taxation Office (ATO) will assess your tax liability and issue you with a payment schedule. The schedule will indicate the amount and due date of each instalment. The amount of each instalment is based on your expected income and tax liability for the financial year. This is registration is automatic and usually occurs when you lodge a tax return with a tax amount payable.
For an example, let's say a business owner is expecting to earn $100,000 in taxable income in the financial year and their estimated tax liability is $25,000. The ATO would calculate that the business owner should pay four instalments of $6,250 each, due on the following dates:
- 28th April
- 28th July
- 28th October
- 28th January (of the next year)
It's important to note that if your financial situation changes during the year and your income or tax liability is different from what was estimated, you may need to adjust your PAYG instalments. You can do this by contacting the ATO and requesting a variation to your instalment schedule. Failure to pay your instalments on time may result in penalties and interest.
PAYG Instalments thresholds & making variations
The Australian Taxation Office (ATO) has established certain thresholds for determining whether a taxpayer is required to pay PAYG instalments. Generally, taxpayers are required to pay PAYG instalments if their estimated income tax liability for the current financial year is more than $1,000 and their estimated taxable income for the current financial year is more than $4,000.
However, the ATO has established different variations for PAYG instalments that may apply to taxpayers who have specific circumstances. These variations include:
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Small Business Entity (SBE) Variation: Taxpayers who are considered small business entities (SBEs) and have an annual turnover of less than $10 million may be eligible for a variation of their PAYG instalment. SBEs may be able to pay instalments based on their GST turnover or on a fixed amount determined by the ATO.
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Non-Business Variation: Taxpayers who are not carrying on a business and have an annual taxable income of less than $40,000 may be eligible for a variation of their PAYG instalment. This variation allows taxpayers to pay instalments based on their taxable income or on a fixed amount determined by the ATO.
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Annual Instalment Variation: Taxpayers who have a history of consistent income and tax liability may be eligible for an annual instalment variation. This variation allows taxpayers to pay one instalment per year, instead of four instalments.
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Instalment Notice Variation: Taxpayers who have an unexpected change in their income or tax liability during the year may request a variation of their instalment notice. For example, if a taxpayer loses their job or experiences a significant reduction in income, they may be able to reduce their instalment amount.
It's important to note that these variations are not automatic and taxpayers must apply to the ATO to be eligible.