What is Pay As You Go Instalments – and why do I have to pay it?

We have written before about PAYGI. But this is the season where every accountant in Australia gets puzzled enquiries from clients about what it is and why do they have to pay it.

The first time most people find out that such a thing as PAYGI exists is when they get a polite letter for the Australian Taxation Office telling them that they have been entered into the Pay As You Go Instalments tax role (although you can enrol voluntarily – more about this later).

Most peoples reaction to that is “what the hell is this?” closely followed by “why do I have to pay this?”

Basically, PAYGI is where you are making pre payments towards your next income tax return. It is usually triggered when you lodge your income tax for the year and that has resulted in the debt to the Australian Taxation Office. If the debt is big enough – enrolment is pretty much automatic.

The reasoning is that if you had a debt this year – you will have a debt next year. The ATO know how hard it is getting people to cough up big lump sum payments. SO they are getting you to prepay your expected, future income tax debt in instalments – every three months (or sometimes monthly).

So they will estimate – based on past tax returns, how much that future tax debt will be. Then they chop it into four bits and make you pay each of those four bits every three months (every quarter). The idea is that when you lodge your next income tax return – you have already paid it off during the year.

(Sparing the poor ATO the chore of chasing you up for big amounts of money).

If you think about it, this is exactly the same as when you work for a wage. Every time your employer pays you – you can see on your pay slip that they have deducted a percentage and given it to the ATO for your next income tax.

When the employer does that it’s called Pay As You Withholding.

When you do it – it’s call Pay As You Go Instalments. You can read what the ATO have to say about it HERE.

So why do get a bill from the ATO? Usually it’s because you have received some sort of untaxed income. Maybe a rental property, crypto, dividends, royalties or the like. But most commonly it’s because you have started a business of some sort – either part time or full time.

Tax can be a huge problem for new small business’ and sole traders. Starting a new business is so challenging and is such a huge learning curve that a lot of people put off thinking about tax until it is far too late.

There is nothing worse than thinking you have made a huge profit in your first year and realising that most of it will go to taxes.

Even worse, you’ve already spent it and won’t be able to pay it in full. (If that happens to you – talk to your accountant about negotiating a payment plan with the ATO).

But what happens if your circumstances this year are different from last year? The debt came from a one off event that won’t be repeated. Or your business is not doing as well as it did last year?

Talk to your tax agent about this. Because they can do what is called a “variation”. You can do it too. From the Online Services for Business portal if you are a company. Or MyGov if you are a sole trader or individual.

In some circumstances you can leave the PAYGI system but you should discuss that one with your accountant.

Every instalment you get (quarterly for most people) is sent to you as an BAS (Business Activity Statement). If you are enrolled for other tax roles (GST, for example) those roles are part of the same BAS.

But even if you don’t have any other tax roles, don’t have an ABN or have ever had a business – it will still be sent to you as a BAS.

In the online portals you will see the amount the ATO have decided you should pay on that BAS. Click the “Accept” button and that amount you see on the page is what you need to pay. Click on the “Vary” button just underneath and you can vary down (or up) to what ever you think the right amount is.

Remember, you have to do this before the due date of the BAS.

Be careful. The ATO is not pedantic about this but you can’t just put in $0 because you don’t feel like paying tax right now. You have to make sure you have paid the ATO enough to cover your actual income tax debt when you get around to lodging your income tax return for that year.

If you have varied everything to nil on every quarter but you end up with a $20,000 income tax debt – the ATO will not be happy!

There is a handy calculator on the ATO website that lets you estimate what to vary to. You can find it HERE.

You might wonder what happens if I haven’t varied your last couple of BAS – but should have. Since you can’t really revise – you can claim a “5 B credit” on your current BAS instead.

In other words, claim a credit so the amounts across all the BAS make the numbers come up right for the year. For more information about this, go HERE.

So that’s it. Nothing is surer than death or taxes. So don’t stress and don’t complain too much about the ATO doing this to you. Because there isn’t much you can do about it. At the end of the day you are not paying any extra tax – just paying it a little earlier than you would like.


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