Pay As You Go Instalments

So you just did your income tax and the next thing you know – you get a letter from the tax man telling you that you have to pay some of this years tax ahead of time in instalments! What happened?

Pay As You Go Instalments (PAYGI) is where the Australian Taxation Office believes that you will be faced with a big tax bill at the end of the financial year. Instead of trying to get you to pay off one big debt when you do your tax return at the end of the year – the ATO is making you pay it ahead of time, every three months (sometimes every month – if it’s going to be a really big bill).

So it’s really the same as Pay As You Go Withholding (PAYGW). That’s the chunk of change your employer takes out of your pay every week and gives to the tax man. Instead of your employer doing it – your doing it yourself.

So PAYGI is about income other than wages – with wages, your employer is taking the tax out of your pay. When you do your income tax return – all the money you have personally earned, from whatever source, is used to access your tax liability. Then all the tax money the ATO has received, from PAYGW or PAYGI, is used to pay off your tax bill for the financial year. You pay too much – you get a refund. You pay too little – you get a bill.

PAYGI is actually not a bad thing. If you have an income – a hobby you make a bit of money from, rents, investments, whatever. You probably won’t be thinking of holding back enough to pay the taxes on it. Even if you do – the ATO (probably wisely) thinks it’s easier (for example) to get $1000 out of you every three months, rather than $4000 at the end of the year.

Which raises an important point. PAYGI happens after you do your tax return. If your tax bill was big enough. The trigger could be as low as $500 of notional tax – you will automatically be enrolled in PAYGI. But that is really too late. You are already facing a large (possibly very large) debt. If you are earning any income other than wages subject to PAYGW then you should consult with your tax agent and find out if it would be a good idea to enrol in PAYGI voluntarily.

It really is better for you to make small payments across the year – your tax agent can enrol you. Or you can ring the ATO on 13 28 66 for businesses or 13 28 61 for individuals . Or, even easier, enrol online via the Business Portal . Or, if you are an individual or sole trader you can also do it via MyGov (once you have added the ATO portal to MyGov).

You can find the Business Portal HERE.

You can find MyGov HERE.

How does it actually work?

The tax office will tell you how much you need to pay but you can also go to the ATO website to work it out. There are two methods that you can read about on the same page. The PAYG Instalment amount method, or the PAYG Instalment rate method. Go to: How much you need to pay

You will get sent an activity statement for each quarter or month. Or, if you are already doing activity statements, it will be an extra label on the statement.

You can vary the rate or even end it. This is handy if your circumstances change and you think you will get less (or more) income during the year. But there is the potential for penalties if you vary down but end up being wrong. The ATO will be very suspicious of people who get it too wrong. It looks to them like you were trying to dodge paying up front. Read about it at: How to vary your PAYG instalments

And finally, here is the central page on the ATO website to read all about it: PAYGI Instalments

Don’t forget to get professional advice about PAYGI (or anything to do with taxation). You can always call us on 1300 268 800 for a word of advice.