PAYG (Pay As You Go) Instalments is a system used by the Australian Taxation Office (ATO) to collect prepayments of tax from individuals and businesses throughout the financial year. The aim of PAYG instalments is to help taxpayers manage their tax obligations and reduce the risk of having to pay a large tax bill at the end of the financial year.
How do PAYG Instalments work?
Under the PAYG Instalments system, taxpayers are required to make regular payments throughout the year based on their expected income. Generally, an instalment is required to be paid each quarter.
The amount of the PAYG Instalment is calculated by the ATO, based on the taxpayer’s most recent tax return and their expected income for the current financial year. This amount is usually the tax paid in the most recent tax return adjusted for changes in the gross domestic product (GDP), divided by four. The ATO will provide the taxpayer with a notification of the amount to be paid, along with the due date for payment, which is usually on the 28th of the month after the instalment period.
It’s important to note that PAYG Instalments are only an estimate of the tax liability for the financial year. At the end of the financial year, taxpayers will need to lodge their tax return as usual and may receive a refund, or be required to pay additional tax, depending on their actual taxable income.
Who is required to make PAYG Instalments?
Most businesses and individuals who earn income that is not subject to PAYG Withholding are required to make PAYG Instalment payments. This includes companies, self-employed individuals, investors, and some trusts and partnerships. Specifically, the ATO will enroll a business or individual in the PAYG Instalment system where the estimated tax for an income year on non-PAYG Withholding income is estimated to be above $500.
Benefits of PAYG Instalments
One of the key benefits of PAYG Instalments is that it helps taxpayers to manage their tax obligations throughout the year. By making regular payments, taxpayers can avoid the stress of having to pay a large tax bill at the end of the financial year.
Finally, PAYG Instalments can also be beneficial for cash flow management. By spreading the tax liability over the financial year, businesses and individuals can better manage their finances and avoid cash flow issues that may arise from a large tax bill.