FAQ: What Are PAYG Tax Instalments?

One of the more confusing elements of our tax system is the PAYG instalment system. In this blog we set out to answer our most commonly asked questions in relation to the system.

What are PAYG tax instalments?

PAYG tax instalments are regular payments of tax, so that by the time you lodge your tax return you should not have such a large tax bill.

Why do I have to pay PAYG tax instalments?

PAYG tax instalments are paid on business or investment income by companies, individuals and super funds. Investment income includes income from:

• Interest on bank accounts

• Rental properties

• Dividends

• Trust Distributions

Where:

• Estimated tax for the current year is more than $500 on business and/or investment income; or

• Business and/or investment income is $2m or more on your most recently lodged tax return

How often do I have to pay PAYG tax instalments?

PAYG tax instalments are usually paid quarterly.

Can I change the frequency of my PAYG tax instalments?

In some circumstances you can vary the frequency of your PAYG tax instalments.

To change to 2 instalments per year both of the following must apply:

• You are a quarterly PAYG instalment payer and are using the instalment amount; and

• You are either:

  • An individual carrying on a primary production business; or

  • A special professional, such as an author, inventor, performing artist, production associate or sportsperson.

You are eligible to pay PAYG instalments annually if, at the end of the first quarter of the income year, all of the following apply:

• your most recent estimated tax notified by the ATO was less than $8,000; and

• you either:

  • are not required to be registered for GST as either an individual or a partner in a partnership, or

  • voluntarily registered for GST and have chosen to remit GST annually, either as an individual or a partner in a partnership; and

• you are not a company that is part of an instalment group, a head company of a consolidated group or a participant in a GST joint venture.

The ATO will advise, in their letter telling you that you have entered the PAYG tax instalment system, if you are eligible to change the frequency of your instalments.

How do I change my PAYG tax instalment frequency?

You can manage the frequency of your PAYG tax instalments through myGov or your tax agent (fees may apply).

How are PAYG instalments calculated?

The ATO provides you with 2 options to pay your PAYG instalments.

Option 1: Instalment amount

This amount is a fixed quarterly amount based on the most recent tax return lodged with the ATO. This method is best if you like to keep things simple and your income doesn’t vary by a lot from quarter to quarter.

Option 2: Instalment rate

Again the rate is based on your most recent tax return lodged, however you will be required to calculate your instalment income and multiply it by the instalment rate. This method is more complicated, however your tax payments will more closely match the timing of your income.

What if my income changes and therefore my PAYG tax instalments are too high?

You have the option to vary your instalments if you think they may be too high. You are under no obligation to vary, if you do not wish to do so.

How do I vary my PAYG tax instalments?

Each time the ATO issues a PAYG instalment notice it will include a place to vary the instalment. Alternatively the variation can be done on myGov (once the instalment notice is issued) or you can ask your tax agent for assistance (fees may apply).

What happens if I vary my PAYG tax instalments down and then have tax to pay when I lodge my tax return?

If your varied instalments are less than 85% of your total tax payable you may have to pay a general interest charge on the difference between what was paid and what should have been paid. There may also be penalties, depending upon the circumstances.

It is important to carefully estimate your income and resulting tax liability if you decide to do this.

What happens if I overpay my PAYG tax instalments?

You will receive a refund of any PAYG tax instalments, that have been overpaid, when you lodge your income tax return.

The ATO will also recalculate your further instalments, so that there won’t be as much to pay.

Can I just pay what tax I owe the tax office when I lodge my return and not bother with PAYG instalments?

No. You cannot opt out of the PAYG instalment system. You can only leave the PAYG instalment system when you no longer meet the $2m or more income or $500 or more tax thresholds.

How will I know if I have to pay PAYG tax instalments?

The ATO will send you a letter advising you that you have entered the PAYG tax instalment system if you have lodged a tax return that meets the threshold requirements.

What happens if I enter the PAYG instalment system part way through a year?

Not everyone neatly enters the PAYG instalment system before the end of the first quarter, this will occur if you lodge a tax return after 30 September. In these situations your total instalment amount is calculated based on a full year and dividend by 4 to calculate the instalment amount. You will pay the instalment amount as per the schedules outlined below. This means that your total instalment for the first year will be less than 100% of your estimated tax.

What happens if my PAYG tax instalments increase during the year?

PAYG tax instalments will increase during a year if you lodge your tax return and the tax payable is more than the prior year. The ATO will calculate your new instalment amount and divide it by 4 to calculate the new quarterly instalment amount. They will then increase your next instalment amount to catch up for any shortfall in previous quarters. The following quarters will return to the new quarterly instalment amount.

When are my PAYG tax instalments due?

Most people who are in the PAYG tax instalment system pay the tax on a quarterly basis. The due dates for quarterly payments are as follows:

• Quarter ended 30 September - Due date 28 October

• Quarter ended 31 December - Due date 28 January

• Quarter ended 31 March - Due date 28 April

• Quarter ended 30 June - Due date 28 July

For those eligible to pay in 2 instalments the payments are due:

• Period 1 July to 31 March (ie 75%) - Due date 28 April

• Period 1 April to 30 June (ie 25%) - Due date 28 July

And annual instalments are due by 21 October for those using a tax agent, however if you self prepare your return, simply lodge your return by 31 October.

How do I pay my PAYG tax instalments?

You will receive a PAYG instalment notice approximately one month before the payment is due. It will outline the amount of the payment, the due date and how payment can be made.

What do I do if I can’t afford to pay a PAYG tax instalment?

You can request a payment arrangement with the ATO if you cannot afford to pay your instalment in full by the due date. This can be done:

• Through your tax agent (although fees may apply)

• Via myGov

• By phone the ATO on 13 72 26

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Disclaimer: This is general information only and is not advice of any sort. No warranty or representation is provided by Accounting Heart Pty Ltd as to the accuracy, currency or completeness of the information contained in this blog. Readers of this blog should not act or refrain from acting in reliance upon any information contained herein and must always obtain appropriate taxation and / or other advice as may be appropriate having regard to their particular circumstances.