PAYGI Explained
With endless terms and dates to remember when it comes to tax as a business owner, it can be hard to keep track of which payments are contributing to what tax obligations, if you’re ahead or behind on payments and how much you should’ve been putting aside every time an invoice is paid. Essentially… that’s why we have jobs 😉
PAYGI (Pay as you go instalments) is something that will apply to most business owners at some stage and it’s well worth understanding what it is exactly they are.
Key highlights:
- Smooth Cash Flow Management: PAYG instalments allow businesses to spread their tax payments throughout the year, easing cash flow and preventing large, unexpected payments at tax time.
- Flexible Payment Options: The PAYG system offers quarterly and annual payment options, with the flexibility to adjust instalment amounts based on income, helping businesses manage tax obligations in line with their revenue.
- Enhanced Tax Compliance: Regular PAYG instalments help businesses stay compliant, reduce end-of-year tax pressure, and avoid penalties, contributing to better overall financial planning and stability.
What is a PAYGI?
Designed by the Australian Tax Office (ATO), PAYG instalments are quarterly payments made in advance, which go towards your next anticipated Income Tax liability. Rather than copping one lump sum amount at the end of the financial year, you’ll have already contributed significantly to the debt – if not have already paid it in its entirety. If you have overpaid, the Tax Return will result in a refund.
Why Is the PAYG System Important for Small Businesses?
The PAYG instalment system offers small businesses several benefits:
- Cash Flow Management
By spreading out tax payments, businesses can better manage their cash flow, avoiding large, unexpected payments. This approach helps business owners budget more efficiently and maintain financial stability. - Compliance and Tax Planning
PAYG instalments also support tax compliance, reducing the risk of penalties. Staying on top of these payments means businesses can be better prepared and even optimise tax planning strategies, minimising overall liabilities.
What Are the Different Types of PAYG Instalments?
PAYG instalments are designed to be flexible, allowing businesses to choose a method that best suits their cash flow needs and financial planning strategies. Below are the different types of PAYG instalments available for small businesses:
Quarterly PAYG Instalments
For most small businesses, the default PAYG instalment frequency is quarterly. This approach requires businesses to lodge and pay instalments every three months. The amount is based on either a fixed percentage of your business’s income or a pre-calculated instalment amount provided by the ATO. Quarterly payments are ideal for businesses with steady cash flow and predictable earnings, helping them spread their tax liability throughout the year.
Annual PAYG Instalments
Some businesses may opt for an annual PAYG instalment, which consolidates the tax obligation into a single payment. This option can be suitable for businesses with seasonal income or those that prefer handling tax matters less frequently. However, businesses must apply for this variation through the ATO, and it is only available if certain conditions are met, such as turnover thresholds and compliance history.
PAYG Instalment Variations
The PAYG instalment system offers flexibility through instalment variations. Businesses can request to adjust their instalment amount or rate based on current financial circumstances, such as a change in projected income. If a business expects lower income than initially estimated, varying the instalment can help manage cash flow effectively, preventing overpayment and the need for future refunds. Conversely, if income increases, adjusting the instalment ensures compliance and avoids end-of-year tax surprises.
How Are PAYG Instalments Calculated for Small Businesses?
PAYG instalments for small businesses are based on either a fixed percentage of business income or a set amount determined by the ATO. The calculation method depends on your income from the previous tax return or current business earnings.
- ATO Calculation
The ATO may calculate an instalment amount using past income data, ensuring simplicity and predictability for businesses. - Instalment Rate Option
Businesses can choose to calculate instalments based on a percentage of current income, offering flexibility if revenue changes throughout the year.
Comparison of PAYG Instalments with Other Methods
PAYG instalments are one method for managing tax obligations, but other options exist for businesses to meet compliance requirements. Below is a comparison table highlighting the key differences between PAYG instalments, annual tax payments, and PAYG withholding.
| Tax Compliance Method | Description | Frequency | Flexibility | Best For |
| PAYG Instalments | Prepayments based on income or ATO estimates | Quarterly or Annual | Adjustable if income varies | Small businesses, sole traders |
| Annual Tax Payment | Lump sum tax paid at the end of the financial year | Annually | Fixed, not adjustable | Seasonal businesses |
| PAYG Withholding | Tax withheld from employee wages or contractor payments | Ongoing (per payroll) | Adjustable per employee details | Employers, contractors |
This table offers a quick comparison to help businesses decide the most suitable tax method based on their structure and income patterns.
How do I set PAYGI up?
The ATO will automatically enter you into PAYG Instalments if you have the following (as an individual):
- Instalment income from your latest tax return of $4,000
- Tax payable on your latest Notice of Assessment is $1,000 or more
- Your estimated (notional) tax is $500 or more
Note: instalment income is the total income from your business and other investments (excluding capital gains income), before GST. For instance rental income and interest income are included.
If you think it would be beneficial for you to be in the PAYG Instalment system, you can voluntarily apply (we can also do this on your behalf).
A major benefit of pre-paying your tax liability quarterly is that it becomes more manageable from a cash flow perspective – bite size amounts to pay, rather than one big chunk! We also find it helps clients to budget better rather than that awful EOFY scramble trying to find the cash to pay in one hit.
Each quarter, the ATO will send a notice to you which will state the amount to pay, when it is due and the payment options available to you.
Need a hand? Get in touch.
FAQ
Can I vary my PAYGI?
Yes, we can vary your PAYGI should circumstances with your tax have changed (for example if you have previously worked for yourself, but are now an employee and being paid a wage).
You can reach out to us to discuss whether varying your PAYGI would be appropriate for you.
What happens if I miss a PAYGI?
If you miss a payment, it becomes just like any other debt with the ATO. It can accrue general interest charges and the ATO will likely start sending reminder notices to you regarding the overdue amount.
How Can a Professional Accountant Help with PAYG Instalments?
A professional accountant can be invaluable when managing PAYG instalments for your business. Here’s how they can assist:
- Accurate Calculations
Accountants ensure PAYG instalments are correctly calculated, based on your current business income and financial circumstances, reducing the risk of errors or penalties. - Optimising Cash Flow
They provide strategies to align instalment payments with your cash flow, helping you avoid cash shortfalls and ensuring smooth financial operations. - Lodgement and Compliance
Accountants manage PAYG instalment lodgements on your behalf, ensuring timely submissions and compliance with ATO regulations. - Adjusting Instalments
If your income fluctuates, accountants can adjust your instalments accordingly, keeping them in line with your business’s current performance.
By leveraging their expertise, accountants not only streamline the PAYG process but also provide peace of mind, ensuring your tax obligations are managed efficiently. Contact our accountants in Melbourne CBD today for immediate assistance.
Can I lodge PAYG instalments directly through Xero?
Yes, Xero integrates with the ATO’s online services, allowing you to lodge your PAYG instalments directly, making the process efficient and compliant. Contact our Xero accountants today if you need help.
What records should be kept for PAYG instalments?
It’s essential to keep detailed records, including income statements, business expenses, and instalment payments. These records provide the foundation for accurate tax calculations and allow for adjustments when business income fluctuates. Effective bookkeeping for small business services ensures all financial information is up to date, making it easier to meet tax obligations and lodge PAYG instalments correctly.
