Pay As You Go (PAYG) tax instalments might seem somewhat self-explanatory. However, there are key points to know, especially if you’re new to the system. If you’ve just started your business, managing PAYG instalments means you’ve truly started on your growth journey.
The Australian Tax Office (ATO) has different methods that taxpayers can use to pay their annual taxes. The PAYG scheme was enacted to create regular tax instalments for entities that meet certain criteria. The result of this is more manageable and controlled tax payments, rather than one, often scary tax bill due at the end of the financial year.
If you’re interested in knowing more about PAYG, we’ll cover what PAYG instalments are, how they work, and other common questions.
What Are PAYG Instalments?
PAYG instalments are payments you make on taxes for investment and business income. In other words, if you run a business or invest and make more than the annual income threshold, you’ll need to account for PAYG.
Depending on your entity structure, the thresholds for automatic entry into the PAYG scheme vary.
How PAYG Instalments Work
You’ll usually pay PAYG instalments quarterly. By paying them on a quarterly basis, you avoid potentially owing a large lump sum after lodging your tax return. They can also help you plan ahead, budget for tax costs, and manage your cash flow better.
Even though you send regular payments through the PAYG system, you’ll still need to lodge your annual income tax return by the end of every financial year.
PAYG Instalments vs. PAYG Withholding
There are two types of PAYG tax payment methods—instalments and withholding. For tax purposes, it is important to understand the differences between PAYG instalments vs. PAYG withholding
- PAYG Withholding (or PAYG-W) – an employer withholds an employee’s tax and pays the tax directly to the Australian Tax Office on behalf of the employee or contractor.
- PAYG Instalment (or PAYG-I) – commonly a sole trader or business owner makes quarterly payments to the ATO based on their business or investment income.
A business that has income withholding obligations must do the following:
- Register with ATO for PAYG withholding
- Withhold a certain percentage of employees’ and contractors’ wages
- Pay the withheld amount to ATO and lodge activity statements
- Provide payment salaries summary to all payees by 14 July of each year
- Submit an annual PAYG withholding payment summary to ATO by 14 August of each year
You’ll need to register online through the ATO to set up PAYG withholding. Keep in mind that PAYG withholding is not the same as payroll tax, which varies by state. For payroll tax, you’ll want to check the revenue office for your location.
PAYG Instalments – How To Pay Them
There are two ways in which you can pay the PAYG instalments:
- Automatic entry after meeting the entry threshold
- Voluntary entry before ATO mandates it
The two methods have the same end goal, reducing the tax bill by the end of the financial year.
You may be automatically subject to PAYG instalments if you exceed an income threshold. The ATO will send you a notice that you have been enrolled in PAYG. They may also state how much you need to pay, and the dates you should lodge your tax returns.
The ATO determines entry thresholds depending on the information an individual reported in their latest tax return. The instalment income is the main factor that ATO considers.
Instalment income is the gross business and investment income, excluding goods and services tax (GST) and capital gains.
An individual or trust will automatically be added to the PAYG instalments system if they meet the following:
- A notional tax of $500 or more
- Tax payable of $1,000 or more on their latest notice of assessment
- Instalment income of $4,000 or more on the latest tax return
The ATO automatically enrolls a company or super fund if it:
- Is the head company of a consolidated group
- Has instalment income of $2 million or more from its latest tax return
- Has notional tax of $500 or more
Voluntary entry is when you sign up for PAYG before the ATO enrolls you automatically.
An individual can plan ahead and enroll in PAYG instalments before meeting the ATO thresholds. Voluntary entry is good for sole traders or firms who anticipate a huge profit or are new to business. Enrolling voluntarily may help a business or investor plan their income tax payment and budgets beforehand.
You can enter voluntarily through the following ways:
- A phone call to the ATO on 13 28 66
- Online through myGov for sole traders
- A registered tax or business activity statement (BAS) agent
How to Estimate PAYG instalments
The amount you pay in instalments will depend on your income. The ATO will use the latest lodged tax return to calculate a company’s or individual’s PAYG instalment rate. To calculate this, the ATO uses the instalment rate calculation below.
- (Estimated (notional) tax ÷ instalment income) × 100.
If the calculated rate is more than the highest income tax rate for your entity type, the ATO may reduce your rate. Below are the ATO’s reasonable instalment rates by entity type:
- Individuals and sole traders – 55%
- Small firms and trusts – 55%
- Superannuation funds and self-managed superannuation funds – 45%
- Corporate tax entities – 30%
Contact Visory Today
PAYG instalments, withholding, payroll taxes and more can be a lot to navigate and manage without expert help. Many businesses choose to outsource payroll and bookkeeping to free up their time for other tasks.
Our team at Visory can help you prepare for taxes and manage your bookkeeping. We are a team of expert bookkeepers who can help you with everything from payroll and bookkeeping to accounts receivable. Contact us today to find out how we can help you.