What are PAYG instalments?
When your earnings from business and investments reach a specific threshold, you are required to pay your income tax in smaller installments known as PAYG (Pay as You Go) instalments.
The purpose of PAYG instalments is to prevent you from facing a large tax bill when you file your annual income tax return.
Even if you make PAYG instalments, it is still necessary for you to submit an annual income tax return. These instalments serve as regular prepayments of the tax that you owe on your business and investment income.
PAYG instalments operate by either automatically enrolling individuals or allowing them to request entry. Regular payments, usually made quarterly, are required based on the individual’s business and investment income.
These payments are deducted from the tax liability when filing the tax return, resulting in a reduced or zero amount owed.
It’s important to differentiate PAYG instalments from PAYG withholding, where employers deduct taxes from employee payments and remit them to the tax authorities, minimizing the chances of a substantial year-end tax bill.
Entry thresholds
The determination of whether an individual needs to pay PAYG instalments relies on the information provided in their most recent tax return.
One aspect considered is the instalment income, which includes gross business and investment income, excluding GST and capital gains.
Automatic entry into the PAYG instalments system applies to individuals and trusts if they meet the following criteria:
- Instalment income from the latest tax return is $4,000 or more.
- Tax payable on the most recent notice of assessment amounts to $1,000 or more.
- Estimated tax is $500 or higher.
In the case of companies or super funds, they will be automatically enrolled in the PAYG instalments system if any of the following conditions are met:
- Instalment income from the latest tax return is $2 million or more.
- Estimated tax is $500 or higher.
- They are the head company of a consolidated group.
Initiating PAYG instalments payment
You will receive notification when you enter the PAYG instalments system.
If you use online tax services for business or Standard Business Reporting software, you’ll receive your instalment information 21 days before the due date.
If the above situation does not apply, you’ll receive a paper letter in the mail. If the tax authorities have your mobile phone number, you will also receive an SMS reminder.
Once contacted, the tax authorities will provide you with the following details:
- Payment schedule: When to pay.
- Frequency: How often to make payments (usually quarterly).
- Amount: How much to pay, along with options for calculating your instalments.
Payments commence once you receive an activity statement or instalment notice from the tax authorities.
Voluntary Entry to PAYG Instalments
If you’re new to business or anticipate earning business and investment income exceeding the threshold, it is advisable to voluntarily enter the PAYG instalments system.
By prepaying your tax through PAYG instalments, you can smooth out your cash flow and prevent a large tax liability when filing your tax return.
Determining your PAYG instalments
Option 1: Instalment Amount
The tax authorities calculates the amount you need to pay, and no calculations are required on your part. The instalment amount is provided on your activity statement or instalment notice.
Option 2: Instalment Rate
If your business or investment income fluctuates significantly and you prefer to manage your cash flow accordingly, this option is suitable. Your payments will vary based on your income levels.
To calculate the amount to pay, multiply your instalment rate (provided by the tax officials) by your business and investment income. The instalment rate is expressed as a percentage and will be specified by the tax authorities.
Selecting Your Preferred Option
Both options will be displayed on your activity statement or instalment notice, and you can choose your preferred option when you lodge. The option you choose remains in effect for the entire financial year. If you wish to change options, you can do so on your first activity statement of the next financial year.
Impact on Total Tax Amount
Regardless of the option you choose, it does not impact the total income tax you owe for the year. When you lodge your tax return, the PAYG instalments you have made are credited against your income tax liability. Any excess payments will be refunded, and any shortfall will need to be paid.
Managing Expected Tax Liability
If you anticipate that your PAYG instalments will exceed or fall short of your expected income tax liability for the year, you have two choices. You can either pay the calculated instalments as they are or vary the instalment amount or rate.
However, it’s important to note that this does not change the total income tax you owe for the year. When you lodge your tax return, the PAYG instalments made are applied to your income tax liability. Excess payments will be refunded, while any shortfall will need to be paid.
Consideration for Interest Charges
If you choose to reduce your instalments and it results in a significant tax shortfall at the end of the year (15% or more), you may be subject to interest charges.
Due dates for PAYG instalments
When entering the PAYG instalments system, the tax authorities will provide you with a letter through mail or online, indicating the frequency of lodgment and payment:
- Quarterly Instalments: Most taxpayers are required to pay quarterly instalments.
- Two Instalments: Depending on your circumstances, you may have the option to pay two instalments per year or one annual instalment.
- Monthly Instalments: Businesses with instalment income exceeding $20 million must lodge and pay their PAYG instalments on a monthly basis.
Due dates for quarterly instalments
Your activity statement or instalment notice will specify the due date for each quarterly instalment. The standard due dates for quarterly instalments during an income year are as follows:
| Quarter | Period | Due Date |
|---|---|---|
| 1 | July-September | 28 October |
| 2 | October-December | 28 February |
| 3 | January-March | 28 April |
| 4 | April-June | 28 July |
If you lodge your activity statement online, you may be eligible for a 2-week extension on the usual due dates.
However, if you pay GST monthly, the due date remains the 21st of each month, and the 2-week extension for electronic lodgment does not apply.
If you receive an instalment notice, you only need to pay the specified instalment amount by the due date without lodging it.
Two-instalment payment
For two-instalment payers, you need to make two payments as follows:
- By 28 April, you are required to make a payment equivalent to 75% of your total annual PAYG instalments.
- Pay the remaining amount by 28 July.
When paying in two instalments, you must use the specified instalment amount provided by the tax authorities.
Eligibility for Two Instalments
You are eligible to pay in two instalments if the following conditions are met:
- You are a quarterly PAYG instalment payer and use the instalment amount.
- You are either an individual carrying on a primary production business or a special professional (e.g., author, inventor, performing artist, production associate, or sportsperson).
Transitioning from Biannual to Quarterly Instalments
To switch from paying two instalments to quarterly instalments, follow these steps:
- Lodge your activity statement by the due date of the first instalment.
- Change your activity statement to use the instalment rate and calculate your instalments accordingly.
Transitioning from Annual to Quarterly Instalments
If you no longer meet the threshold to pay instalments annually when lodging your tax return, the tax authorities will issue a letter with your new instalment details. If the letter is issued during the income year when you are paying annually, it will:
- Display your new estimated (notional) tax.
- Confirm that you are still eligible for annual payments instead of quarterly for that year.
- Provide any other information wherever needed
Annual instalment
For individuals who prepare and lodge their own tax return, there is no need to lodge the instalment notice or pay the annual instalment.
Simply lodge your tax return by 31 October. However, if you use a tax agent, you must pay your annual instalment by 21 October before lodging your tax return.
It is important to pay the annual instalment before lodging the return to ensure the correct amount is credited in your income tax assessment.
If your tax agent lodges the return before 21 October, pay the amount shown on your PAYG instalment notice by that date and do not lodge the notice or vary the instalment amount.
Choosing to Pay Annually
If you are an individual taxpayer, you can confirm your choice to pay PAYG instalments annually to tax authorities. Be sure to confirm your choice by the due date of the first quarterly instalment. Otherwise, you will continue paying quarterly instalments until the next year.
Eligibility for Annual PAYG Instalments
You are eligible for annual PAYG instalments if, at the end of the first quarter of the income year, all of the following conditions apply:
- Your most recent estimated (notional) tax notified by the tax authorities was less than $8,000.
- You are either not required to be registered for GST as an individual or a partner in a partnership, or if you voluntarily registered for GST, you have chosen to remit GST annually as an individual or a partner in a partnership.
- You are not a company that belongs to an instalment group, act as the head company of a consolidated group, or participate in a GST joint venture.
Lodging and paying PAYG instalments
You can access your activity statement or instalment notice through various methods, including online, mail, or through a tax agent or BAS agent.
- If you choose to lodge online, you can find your activity statement or instalment notice in your online tax services account. Alternatively, it will be sent to you via mail.
- The tax authorities will issue your statement or notice when it is time to make a PAYG instalment, typically at the end of each quarter.
Your activity statement or instalment notice provides the following details:
- Instalment Rate or Amount: It specifies your instalment rate (for option 2) or amount (for option 1) for the upcoming period.
- Due Date: Your next instalment’s due date is specified, typically 28 days after the end of the quarter if you make quarterly payments.
Checking if Lodgment is Required
If you receive an activity statement, it is mandatory to complete and lodge it. However, if you receive an instalment notice:
- Paying the Amount Shown: If you pay the amount mentioned on the notice, you do not need to lodge it. Simply ensure that you pay the instalment amount by the due date.
- Varying the Instalment Amount: If you wish to modify the instalment amount, you must complete and submit the instalment notice.
Paying Your PAYG Instalment
To pay your PAYG Instalment to the tax authorities, you can conveniently use electronic methods like BPAY®, credit card, or debit card.
The payment details, including a unique payment reference number, will be available in the following locations:
- If you choose to lodge online, you can easily access the payment details in your Online services account.
- If you prefer to lodge by mail, the payment details will be clearly printed on your activity statement.
Correcting PAYG instalments
There may be instances where you need to rectify errors or make amendments to your pay as you go (PAYG) instalments. Common reasons for correction include:
- Mistakes in Data Entry: If you made an error while entering a figure on your activity statement.
- Underestimated Instalment: If you underestimated your varied instalment amount or rate and need to adjust it accordingly.
- Omitted Income, Gain, or Deduction: If you forgot to report certain income, a gain, or a deduction in your original calculation.
Methods for correcting instalments
To rectify your PAYG instalment errors, you have two options:
- Revision on Current Activity Statement: You can make corrections directly on your current activity statement. Ensure that you revise it before the due date mentioned on the statement or before lodging your tax return for the year (if you lodge it prior to the activity statement’s due date).
- Variation on Future Activity Statement: Alternatively, you can correct the mistake by varying your instalment on a subsequent activity statement. However, the variation must be made on an activity statement within the same income year.
If you previously varied the instalment amount or rate and wish to revert to the original amount or rate, you will need to lodge another variation.
Varying Your PAYG Instalments
Why varying is an option
Changes in your financial circumstances can lead to adjustments in your expected tax liability. As a result, your current PAYG instalments may not align with your actual tax obligation at the end of the year.
By varying your instalments, you can ensure that the amount you prepay is more closely aligned with your projected tax liability.
No Requirement to Vary
It’s important to note that varying your PAYG instalments is not mandatory. The decision to vary does not affect the overall amount of income tax you owe for the year. After lodging your tax return, any excess payments will be refunded, and any shortfalls will need to be paid.
Varying PAYG instalments using instalment amount
Varying PAYG Instalments Using Instalment Rate
- Varying is typically unnecessary due to changes in income, as the payment you calculate will naturally adjust based on your income fluctuations.
- Varying may be considered if the taxable portion of your income has undergone a significant change, such as a substantial decrease in income but with deductions for running costs remaining the same.
Seeking advice from a tax agent can be beneficial in determining whether it is necessary to vary your instalments in both the cases above.
Avoid underestimation
Additionally, if your varied instalments are less than 85% of your total tax payable, you may be subject to a general interest charge and potential penalties.
Varying instalments due to disasters
If you have made a reasonable and genuine effort to estimate your end-of-year tax liability, penalties and interest charges will not be applied.
It is advised to still lodge your instalment notice and discuss a payment arrangement with the tax authorities if you are unable to pay the instalment amount.
When to vary your PAYG instalments
- Lodge your statement or notice on or before the due date of your PAYG instalment.
- Submit it before filing your tax return for the year. The revised amount or rate will be applicable to the remaining instalments for the income year or until you make another modification.
Exiting PAYG instalments
Automatic exit
For Individuals
If you are no longer earning business or investment income, the tax authorities will automatically remove you from PAYG instalments if you meet any of the following criteria:
- You are eligible for the senior and pensioners tax offset in your tax return.
- Your reported business and investment income in your tax return is below $4,000 (for residents) or $1 (for non-residents).
- Your tax debt, after considering PAYG instalments and voluntary payments, is less than $1,000.
- Your calculated PAYG instalment rate is 0.0%.
- Your estimated (notional) tax liability is less than $500.
- If you are under 18, your tax return shows Division 6AA income below the lowest marginal threshold.
- You lodge a final tax return or non-lodgment advice, or your tax agent lodges a ‘further return not necessary’ on your behalf.
Trusts
For trusts, the tax authorities will automatically remove them from PAYG instalments if they meet any of the following criteria:
- Their estimated (notional) tax liability is less than $500.
- They report instalment income below $4,000 in their tax return.
- Their tax debt, after considering PAYG instalments and voluntary payments, is less than $1,000.
- Their calculated PAYG instalment rate is 0.0%.
Companies and super funds
Companies and super funds will be automatically removed from PAYG instalments if all the following conditions are met:
- Their calculated PAYG instalment rate is zero or their estimated (notional) tax liability is less than $500.
- Their instalment income (excluding capital gains) in the most recent income tax assessment is less than $2 million.
- They are not the head company of a consolidated group.
Exiting yourself
If you are no longer earning business or investment income, you have the option to request an exit from PAYG instalments.
However, certain circumstances may prevent you from exiting, such as being bankrupt and in a debt agreement or personal insolvency agreement, or having a tax debt that would exceed $500 after including PAYG instalments.
To request an exit from PAYG instalments, individuals (including sole traders) can use their online tax services. Alternatively, individuals and all businesses can request an exit through their registered tax or BAS agent or by contacting the tax authorities by phone.
Re-entering PAYG instalments
If your income or tax in a tax return exceeds the entry thresholds, the tax authorities will contact you regarding re-entering PAYG instalments. Moreover, if there are changes in your circumstances or if you wish to proactively prepare for your income tax obligations, you have the choice to voluntarily resume PAYG instalments.
Paying PAYG instalments for consolidated groups
When it comes to consolidated groups, the responsibility of paying pay as you go (PAYG) instalments falls on the head company, which acts on behalf of the entire group, including its subsidiary members.
How a consolidated group pays PAYG instalments
After consolidating, the head company assumes ownership of the income, expenses, and other income tax attributes, including PAYG instalments, of the individual members within the group.
Once the head company lodges the consolidated tax return, it receives the consolidated PAYG instalment rate, signifying the group’s maturity.
As a result, the head company becomes responsible for submitting activity statements and making instalment payments on behalf of the consolidated group and its members.
Reporting and payment schedule
As the head company of a mature consolidated group, you must make instalment payments either quarterly or monthly, as determined by the tax authorities (this choice cannot be made independently).
The consolidated group receives a dedicated activity statement specifically for PAYG instalments, and payments are due within 21 days following the end of the month or quarter.
If quarterly payments are chosen, the due dates align with the income year’s balancing date.
For example, if the income year concludes on 30 June, payments are due within 21 days of the end of each subsequent quarter (September, December, March, and June).
Calculating PAYG instalments
Head companies typically calculate their instalments using the instalment rate (option 2). In some cases, head companies may have the option to utilize an instalment amount calculated by the tax authorities (option 1), which is specified on the initial activity statement for the year.
Deregistered member
When a subsidiary member of a consolidated group is deregistered by the Australian Securities & Investments Commission, it ceases to exist as a distinct entity and can no longer be part of the consolidated group.
The head company must notify the tax authorities regarding the departure of the subsidiary member from the group, with the change being effective from the deregistration date.
Subsequently, the tax authorities remove the deregistered subsidiary member from the PAYG instalments system.
Before deregistration, the liquidator must ensure the timely lodging of all relevant activity statements and tax returns, as well as the settlement of any outstanding amounts owed to the tax authorities.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.