What are the Australian PAYG (Pay As You Go) Tax Instalments? Do I Need Them?
By Will Elton, Last updated: 2022-08-30 (originally published on 2019-04-12)
In 2018, the Australian Government raised concerns about the taxpayers’ awareness of their Pay as You Go (or PAYG) instalment obligations. The question remains whether or not the taxpayers are being provided with specific reasoning and sufficient explanation for entering the PAYG system in Australia . Confusion abounds about the eligibility requirements and many people are unable to accurately predict the amount they will be expected to pay.
If you find yourself muddled in with the confused surrounding the Australian PAYG tax, we set set out to clarify the basic terminology and requirements.
What is the PAYG Tax?
Pay as You Go (or PAYG) instalments is an Australian system established to ensure regular payments towards an expected yearly income tax liability. These payments are made regularly (monthly, quarterly, twice a year, or annually) and are paid by individuals, companies, partnerships, trusts, primary producers, and consolidated groups.
The Pay as You Go instalment method is intended to ease the obligatory annual tax payments by dividing them into several smaller amounts, thus making this financial obligation easier to bear.
If you are registered for Goods and Services Tax (GST), PAYG instalments need to be included in the official business statement (BAS). If not, you will have to provide an instalment activity report (IAS).
Who is obliged to pay PAYG instalments?
You are obliged to pay PAYG tax only when the business and/or investment income exceeds a certain amount. Namely, all business owners who are required to pay PAYG instalments are informed of their tax duties by the Tax Office. If you are required to pay for instalments, you should be given an instalment rate as well.
Individuals and trusts are usually required to pay for PAYG if they report more than $4,000 of gross investment and/or business income in the latest tax return.
There are a specific set of circumstance when you are not obliged to pay for instalments, and they are the following:
- If a notional tax is less than $500;
- If the tax payable listed on your last notice of assessment was less than $1,000;
- If you are entitled to the Pensioners and Seniors Tax Offset.
If even only one of the above-listed circumstances applies to your business, you will not have to pay PAYG instalments.
In the case of super funds and companies, instalment payments are obligatory when:
- The instalment rate is more than 0% and the notional tax exceeds or equals $500;
- The instalment income equals or exceeds $2,000;
- The business owner is the head of a consolidated group.
What is PAYG withholding?
Under PAYG withholding rules, an employer is required to collect tax from payments made to other businesses or employees to meet the tax liabilities at the end of the fiscal year. PAYG withholding applies to employers who:
- Have Employment Contracts with full-time employees;
- Have Employment Contracts with part-time employees, independent contractors, or casual employees;
- Make payments to other businesses that do not quote their ABN.
The system is based on withholding the payment amounts that would otherwise be made to:
- Independent contractors with whom you have signed an Employment Agreement;
- Businesses that do not quote ABN;
PAYG withholding can be cancelled in cases where the business ceases operation.
How to pay for PAYG instalments?
A business owner enters the system automatically upon lodging the first tax return that exceeds the threshold. However, it is also possible to enter the system early and pay voluntary instalments. The latter option minimises the amount you must pay at the end of the year.
As of 1st July 2015, all business owners with a myGov account linked to the Tax Office are able to handle their PAYG instalment obligations online. Simply log into your account on a desktop or mobile device to view, manage, or pay for the related taxes.
How much will you have to pay?
Some instalment payers are eligible to choose between the two options for calculating the amount of their PAYG instalment payment obligations:
- An instalment amount option is available to the majority of business owners and individuals. However, super funds and companies with investments and/or business income that equals or exceeds $2,000 are usually not able to choose. The final amount of PAYG instalments is calculated by the Tax Office.
- An instalment rate option allows you to work out the amount based on the instalment rate provided by the Tax Office. All taxpayers are eligible for this option, while it is obligatory for super funds and companies with investments and/or business income that equals or exceeds $2,000 in their most recent tax return.
Generally speaking, the second option poses as the more preferable one because it does not rely on the projection affected by the previous tax situation. An instalment rate is based on the reported income, which is especially beneficial for businesses who experience a slight decrease in earnings. Namely, the lower their income gets, the less they will have to pay for their PAYG instalment.
To find out whether or not you are eligible to choose, check the first activity statement or instalment notice.
PAYG for Partnerships
In partnerships, there is a formula used to calculate the exact instalment rate for one of the parties involved in the partnership: (A / B) x C.
A is an assessable income from the partnership for the previous income year. It is an item under item 51 on the partnership’s tax return.
B is the partnership’s instalment income for the previous income year.
C is the partnership’s instalment income for the current period, and the amount can be obtained from the partnership’s records. Note that in case you experience loss in the previous period, the amount can be 0, in which case a fair estimate amount must be proposed.
PAYG for Trusts
If you choose an instalment rate option, your instalment income will likely be the ordinary income derived in the period which is assessable income for that income year. The assessable income will include your portion of the instalment income which you earned by the trust for the period.
PAYG for Primary Producers and Special Professionals
It is possible to choose a payment schedule that matches the changes in income. Depending on your financial abilities, payments can be made monthly, quarterly, twice a year, or annually.
PAYG for Consolidated Groups
Consolidated groups can choose to be treated as a single entity, in which case expenses, income, and other income tax attributes of all members of a consolidated group will be treated as though they belong to one head company of the group. Instalments are paid either monthly or quarterly, no more than 21 days upon the end of the period.
The PAYG system was established to lessen the financial burden that awaits some individuals and business owners at the end of a financial year.