Avi Lipa

What is the Pay As You Go or PAYG Instalment system?

Updated: Aug 18, 2023

🟠 PAYG Instalments Made Simple

PAYG instalments are like regular advance payments for the taxes you owe on your business and investment earnings.

🟠 Getting Started with PAYG Instalments

When you earn money from your business or investments, you might need to start making PAYG instalments.

🟠 Using PAYG Instalments for Smoother Taxes

No matter if you're a business owner or an investor, planning ahead for your income tax is vital to keep your finances in good shape.

🟠 Here's how PAYG instalments works:

You join the PAYG instalments program. This can happen automatically or by requesting to join.
Throughout the year, usually every 3 months, you make regular payments (instalments). The amount is calculated based on your business and investment earnings.
When you file your tax return, the total PAYG instalments you paid during the year are balanced against your tax bill. This often results in having very little or no additional tax to pay.

Unlike PAYG withholding, where employers deduct taxes from employees' pay and send it to the tax office, PAYG instalments involve you making smaller payments throughout the year to cover your tax.

Watch this video for a clear explanation of the contrast between PAYG withholding and PAYG instalments. It also outlines how PAYG instalments can prevent a hefty tax bill when it's time to file your taxes.

🟠 Getting into PAYG Instalments Automatically

If your tax return shows that you earned a certain amount of "instalment income," you might need to make PAYG instalment payments.

🟠 Determining If You Need to Pay

We decide if you have to make PAYG instalment payments based on details from your latest tax return. One thing we look at is your "instalment income," which is the total amount you earned from your business and investments before accounting for GST and capital gains.

Automatic Entry Criteria

🟠 If you're an individual (including a sole trader) or a trust,

you'll be brought into the PAYG instalments system without needing to ask if you meet all of these conditions:

Your instalment income from your most recent tax return is $4,000 or higher.
The tax you owe according to your latest assessment notice is $1,000 or more.
Your estimated (notional) tax is $500 or more.

🟠 For companies or super funds,

automatic entry into the PAYG instalments system occurs if any of the following is true:

The instalment income from their latest tax return is $2 million or more.
Their estimated (notional) tax is $500 or more.
They are the main company of a consolidated group.

How you start paying instalments

If you are registered for myGov with a linked ATO account, you will receive a letter in your myGov Inbox.
If you have Online services for business, or Standard Business Reporting software, you will receive your instalment information 21 days before the due date.
If none of the above applies, you will receive a paper letter in the mail.

🟠 Choosing to Join PAYG Instalments on Your Own

If you're just starting a business or expect to earn income from your business and investments that goes beyond a certain level, it's a smart choice to decide to join PAYG instalments voluntarily.

🟠 Why It's a Good Idea

When you participate in PAYG instalments, you're essentially paying your taxes ahead of time. This can help you even out your cashflow and prevent a big tax payment when it's time to file your tax return.

Starting Voluntary PAYG Instalments - Simple Steps

🟠 Step 1:

Figure Out How Much Tax to Pay

First, estimate your yearly earnings from your business and investments. Also, consider any deductions you're eligible for. This helps you calculate the tax you should pay in smaller portions through instalments. The PAYG instalments calculator can assist you with this.

Once you have the instalment amount, you'll know how much money to save for covering your tax payments.

PAYG Calculator

🟠 Step 2:

Ask to Join PAYG Instalments

For Individuals and Sole Traders

If you're an individual taxpayer or a sole trader, you can request to start PAYG instalments by accessing your myGov account linked to the ATO's Online services. Go to "Tax," then "Manage," and choose "Enter PAYG instalments."

For Individuals and Businesses

If you're an individual or business, you can request voluntary entry either through your registered tax agent or by calling:

13 28 66 for businesses
13 28 61 for individuals not in business.

🟠 Step 3:

Pay Your Instalments

After you've entered the PAYG instalments system, you'll receive activity statements or instalment notices showing your instalment rate or amount. You can easily view, manage, and pay your instalments online.

The amount you need to pay in instalments or the rate at which you need to pay them is determined using the details from your latest tax return.

🟠 How the Instalment Amount is Figured Out for You

The PAYG instalment you need to pay is determined by looking at the details in your latest tax return. This initial amount is then adjusted to account for any anticipated growth in your income. This adjustment takes into consideration changes in Australia's overall economic activity, which is known as the gross domestic product (GDP).

The main aim is to ensure that your PAYG instalment aligns with what you'll likely owe in taxes for the entire year. If you decide to modify your instalment amount or submit a tax return, this change will also affect the instalment on your next activity statement. It's all about keeping things in line with your updated information.

🟠 Grasping the GDP Adjustment

Each year, the GDP adjustment factor is updated using data from the Australian Bureau of Statistics or a specific percentage defined by the law. This adjustment is linked to shifts in the country's economic performance over the previous two calendar years.

For the 2023–24 income year, the GDP adjustment is set at 6%, as confirmed by the announcement in the 2023–24 Federal Budget and in compliance with the law. Remember,

if your instalment amount was solely based on your previous tax situation without considering adjustments, it might not cover your actual tax obligation. This could lead to you owing extra taxes when it comes time to file your tax return.

🟠 Determining Your Instalment Rate

Your PAYG instalment rate is established using the details from your most recent tax return. The calculation formula for the rate is:

(Estimated tax ÷ instalment income) × 100.

🟠 Keeping Instalment Rates Fair

If the calculated rate ends up being higher than the highest income tax rate for your type of entity, it’ll be adjusted down to a more reasonable level automatically. This adjusted rate will be shown on your activity statement.

🟠 Your instalment rate might seem high before our adjustment if:

You got income from an employee share scheme.
You declared a Higher Education Contribution Scheme (HECS) or Higher Education Loan Program (HELP) debt in your last tax return.
You reported income at the wrong label in your last tax return.
Your return was updated to include excess superannuation contributions.

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If you're interested in learning more about how we can support your business and help you achieve your goals, please don't hesitate to reach out to us today.