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March 23 - Finance - Tax Accounting

PAYG Installments Explained

The tax implications of owning a business are many and keeping track of what you owe and why can be hard. Even harder when you’re growing and your structure is evolving, the tax requirements evolving with it. 

There are two ways to pay business tax: in one lump sum at the EOFY, or in pay as you go installments across the year so you don’t end up with a large amount in one go. The ATO will either automatically opt you in for PAYGI, or your accountant will do so on your behalf before this happens. Here’s what you need to know…

What is a Pay As You Go Installment (PAYGI)?

  • They are quarterly prepayments of the tax on your business income according to your predicted tax bill
  • The installments avoid one big bill at the end of the year, which people often don’t have the money to pay
  • This is different to PAYG withholding, which is the tax employers deduct from payments to their employees. An important distinction!

How Do You Enter PAYGI?

  • It can happen automatically via the ATO according to your latest tax return
  • If you’re an individual (sole trader) or trust, you’ll automatically find yourself entering PAYGI if:
    • installment income from your latest tax return is $4,000 or more
    • tax payable on your latest notice of assessment of $1,000 or more, and
    • estimated (notional) tax of $500 or more
  • Sometimes, accountants will make the decision to enter you into PAYGI before it’s enforced by the ATO because…
    • it’s a great way to manage cashflow
    • big bills to pay in one hit is often unachievable
    • they know you struggle to manage your cash flow  and you aren’t putting enough aside for tax 
    • it’s often a good way of avoiding payment plans (which don’t look great on your credit rating)

What happens once you’re on PAYGI?

You’ll make regular payments throughout the year, based on your business and investment income (basically the ATO’s estimate of how much tax you’ll owe). At the end of the financial year, those payments are totalled and minused off your final tax bill. Ideally you’ll have little to nothing left to pay. 

Questions? Concerns? You know where to find us.