PAYG instalments is a system for paying amounts towards your expected end of year income tax liability. The Australia Tax Office (ATO) calculates your actual income tax liability when they assess your annual income tax return. To make sure your income tax assessment takes into account takes into account the instalments you have paid through the year, you need to finalise your PAYG instalments before you lodge your income tax return.

You can generally choose between two options for calculating and paying your PAYG instalments. PAYG instalments are generally paid quarterly. Some taxpayers have the option to pay two instalments a year and some have an annual instalment option.

Once you have chosen your option, you must continue to use that method for the remainder of the income year. If an option is not applicable to you, your activity statement will indicate this.

Who has to pay PAYG instalments?

Taxpayers who must pay PAYG instalments will be notified by the ATO – typically with a letter notifying them of an instalment rate. The instalment rate is calculated by the ATO from information on their last assessed tax return.

Instalment amount

Taxpayers are required to pay an amount calculated by the ATO. The amount is calculated using the business and investment income from your most recently assessed income tax return. The benefit of this method is that you’ll know the amount of your instalment each quarter, which may help you plan and budget for the payment.

If you think that using the pre-printed amount will result in you paying more  (or less) tax than your expected tax for the year, you can vary it.

Instalment rate

Taxpayers are able to calculate their PAYG instalment amount based on their actual income multiplied by a rate that the ATO provided, the benefit of this method is that the amount you pay reflects your business and investment income for the quarter. You may prefer this method if your income fluctuates.

If you think that using the pre-printed rate will result in you paying significantly more (or less) tax than you expected tax for the year, you can vary it.

As a general rule you have to pay PAYG instalments if:

•   You have reported $2,000 or more of gross business and investment income (excluding any net capital gains) on your last tax return ($1 for non-residents).

•   Your tax payable on your last assessed tax return is more than $500 (disregarding any voluntary payments or PAYG instalment credits that were applied).

•   Your notional tax* is more than $250

•   You are not entitled to the Seniors and pensioners tax offset

*Generally speaking, notional tax is the tax that would have been payable on your business and investment income (excluding net capital gains) in your latest income tax assessment based on current income tax rates.

The $2,000 income threshold does not include salary or wage income that tax has already been withheld from.

The ATO will calculate if you need to make PAYG instalments when you lodge or amend your most recent tax return. If you are no longer required to pay PAYG instalments, the ATO will write to you to withdraw your instalment rate.

You must lodge an annual tax return, even if you have met your PAYG instalment obligations.  PAYG instalments is a system for paying instalments of your expected end-of-year income tax liability.  Your actual tax liability is worked out when your annual income tax return is assessed.  Your PAYG instalments for the year are credited against your assessment to determine whether you owe more tax or are owed a refund.  To make sure you receive the correct amount of credit in your assessment, you must finalise your PAYG instalments before you lodge your tax return.

Here at The Quinn Group, our experienced team of tax accounts, tax agents and tax lawyers are able to assist you with all your taxation needs. Submit an online enquiry or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment today .

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