PAYG instalment basics

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When, and how much |  Changing the rate

It was the US president FD Roosevelt who said that taxes are the dues we pay 'for the privileges of membership in an organised society'. A fine sentiment, but it does little to reduce the pain of paying up at tax time. To help Australians cope with the burden of meeting these dues, the government has in place a mechanism to spread out the pain.

The pay-as-you-go (PAYG) tax instalment system is used to periodically put aside portions of tax throughout the financial year towards the tax liability that is expected to arise at year end on your business and investment income for that year.

Your business will need to register for PAYG instalments. How often you pay and report amounts withheld to the Tax Office depends on the size of your business, but the questions asked when you register will determine that.

After your actual tax liability is worked out at the end of the financial year with your tax return, the instalments you have made throughout the year are credited against your assessment to find if you're owed a refund (if the total of your instalments exceed the actual tax liability) or need to top up that tax payment (if the instalments don't cover the actual tax liability).

When, and how much
You can apply online for PAYG registration at the Australian Business Register. This is also the central collection point for basic information about every business, so you can also register for an Australian business number (ABN), tax file number (TFN), goods and services tax (GST) and so on, and to register your business name.

Once registered, the Tax Office will let you know in writing how often you're expected to make instalments.

PAYG instalments are generally paid either four times per year or twice a year (the latter usually for taxpayers like sportspeople or authors due to their irregular income patterns). However, some taxpayers are eligible to take up the option to pay one annual instalment per year, and the Tax Office letter should advise you if you're eligible for this option. Quarterly payments are generally due by the third week of the month following a financial quarter.

As for how much you'll be asked for, this is either worked out by you or calculated for you by the Tax Office. For the latter, the instalment amount is based on things like your latest income tax assessment and on recent business activity statements.  It is certainly the easier option as the onus is not on you to get the estimates right. And at year end, instalment total and actual final assessment are reconciled anyway.

Working out your instalment amount yourself can make sense for some businesses, as the amounts needed are then based on your income as you earn it, instead of a projection based on a previous result. This can help with handling your cash flow as your tax payments are more closely aligned with your income for that period.

Instalment income is typically gross business and investment income, excluding GST, and includes gross sales, fees for services, interest and rent received, dividends and royalties and trust and partnership distributions. Don't include salary, imputation credits or non-assessable income, and usually not capital gains.

Instalments are similar to the PAYG system for your employees, but that is 'PAYG withholding', and is part of your obligation as an employer to put aside portions of staff salaries for tax on their behalf at each pay. PAYG withholding is not a separate tax on the business. See all the information you need on PAYG withholding here.

Other common payments from which you need to withhold amounts include director fees as well as businesses that do not quote their Australian business number (ABN) on their invoices (which would mean you have to withhold an amount for tax from payments to them, usually at the top marginal rate). Again, the PAYG in these situations is not an extra tax on your business – you are only submitting the recipient's tax to the Tax Office on their behalf.

Some quarterly payers may be eligible for the Tax Office to provide instalment amounts based on a GDP-adjusted method rather than the instalment income method. Basically, this is where the Tax Office takes into account likely growth in your business and investment income based on changes to Australia's GDP (gross domestic product) and applies this growth rate to your notional tax figure.

The Tax Office updates the GDP adjustment factor at the start of each income year using national accounts data provided by the Australian Bureau of Statistics. The adjustment is based on GDP activity over the previous two calendar years. Using this data, the GDP adjustment for the 2012-13 year is 6%.

Changing the rate
When you register for PAYG instalments, the Tax Office will tell you the percentage rate it will apply to tax your business, estimated from previous assessments. The calculation is to simply multiply instalment income by that rate to get your instalment amount.

You can vary your instalment amounts if you believe the Tax Office estimates, which are generally based on a prior year's figures, will not reflect the business realities of the current year. A downward trend in earnings for example may prompt a business to look at tweaking instalments. But it's important to get this right, as there could be a general interest charge if the varied amount is less than 85% of the amount that would have covered your actual liability for the year. So don't vary without good cause.

And don't forget that these PAYG instalments don't replace having to lodge an actual income tax return. You still have to do that. The instalments just go towards making payment for an expected liability. The true year-end liability still has to be ascertained, and the instalment total balanced against it.

Reviewed August 1, 2012

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