Understanding PAYG instalments

Now is a good time to check that your business’ PAYG instalments still reflect the expected end-of-year tax liability.

What are PAYG instalments

PAYG (Pay As You Go) instalments are regular prepayments towards the tax on your business and investment income. They are designed to help you avoid a large tax bill after you lodge your annual income tax return. There are a few key things to know about PAYG instalments:

  1. You are required to pay PAYG instalments if your business and investment income reaches a certain threshold (over $4,000 per year) and your expected tax liability is over $1,000. The ATO will automatically enroll you in the PAYG instalments system if you meet these criteria.
  2. PAYG instalments are typically paid quarterly, with due dates 28 days after the end of each quarter (e.g. 28th October, 28th February, 28th April, 28th July). You can report and pay them through your Business Activity Statement (BAS) if registered for GST, or an Instalment Activity Statement (IAS) if not.
  3. The ATO calculates your PAYG instalment amount based on your most recent tax return. You can choose to pay either a set amount or a percentage rate of your instalment income. 
  4. Failing to pay your PAYG instalments on time can result in interest charges and penalties from the ATO. However, you should still lodge your tax returns even if you can’t make the payments by the due date.

How PAYG instalments are calculated

To calculate your PAYG instalments, there are two main options:

  1. Instalment amount:
    • The ATO will calculate the instalment amount for you based on your most recent tax return.
    • This is the simplest option, as you just pay the amount the ATO provides.
  2. Instalment rate:
    • You can calculate the instalment amount yourself by applying a rate provided by the ATO to your estimated business and investment income.
    • This option is better if your income fluctuates a lot, as you can manage your cash flow by adjusting the instalments.

To use the instalment rate option:

  • Determine your total estimated business and investment income for the year.
  • Apply the instalment rate provided by the ATO to this income to calculate the instalment amount.
  • You can vary this instalment amount if your income changes during the year.

If your business’ circumstances have changed and you think you will pay too much (or too little) in instalments for the year, the instalments can be varied on the next activity statement (due on 28 April 2024 if you pay quarterly). Instalments can be varied multiple times throughout the year. The varied amount or rate will apply for the remaining instalments for the income year or until another variation is made.

Should your adjusted instalments fall below 85% of your total tax liability, you may incur a general interest charge on the shortfall, in addition to the required payment. Depending on the circumstances, penalties may also be applicable.

In cases of uncertainty, it is best not to vary your instalments. Any overpaid instalments will be refunded to you after you lodge your tax return.

For businesses impacted by events such as COVID-19 or natural disasters, the ATO has confirmed that penalties and interest charges will not be imposed on adjusted instalments if a sincere effort has been made to estimate year-end tax liabilities.

Any adjustments made online will result in the electronic issuance of activity statements and instalment notices, eliminating the need for traditional paper documentation. You will need to consider this when deciding how to lodge, revise and vary future activity statements and instalment amounts.

PAYG instalments are a system to help you manage your tax obligations throughout the year, rather than facing a large bill at the end. Understanding how they work is important for the financial health of your business.

Learn more: The difference between PAYG instalments and PAYG withholding

Contact our KMT tax advisers if you need assistance with your activity statements and tax return.

About our advisers

Chrisanthe Lekatis is renowned for her expertise in management accounting, virtual CFO services, and top-tier business advice. She empowers management with tailored strategies for success, streamlining processes to achieve efficient and cost-effective outcomes. Her commitment to building trust and lasting relationships goes beyond professional excellence; it’s a personal ethos. By actively listening and understanding her clients’ businesses and goals, Chrisanthe thrives on collaborative efforts to navigate challenges and collectively achieve their aspirations. Please do not hesitate to reach out if you need assistance.

Michael Fox has been dedicated to the success of his clients, devising comprehensive wealth strategies for both personal and business growth for over 4 decades. With extensive expertise in business governance and family business succession, Michael specialises in empowering emerging businesses and family enterprises by fostering renewal, enhancing value and smooth transitions to the next generation. Please do not hesitate to reach out if you need assistance.

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or get professional advice from a qualified accountant or financial adviser at KMT Partners.