PAYG Instalments – What it is and what it means for you
In the last 10 years of being an Accountant, hands down, this system is the one that trips clients up constantly. If there was a matrix of PAYG Instalments, I think it would look a little like this:
Clients either understand it and pay it, don’t understand it, don’t pay it or fall somewhere in between! Now couple that with the ATO updating their systems during 2021 so clients were not being properly notified of the amounts to pay made a true recipe for disaster.
We thought it might be useful to pull together this explanation guide to help you out.
(Pay As You Go) PAYG Instalment System
Essentially you enter the PAYG Instalment System once the ATO has identified that you are responsible for paying your own income taxes. Income Tax is the tax that is payable on profits. This will happen when you lodge your first income tax return that has income tax payable.
When you enter the PAYG Instalment System, the ATO will issue a letter to you (of which we send to you via email). The letter will read something like this…
The amount listed on the first page is the annual assessment of which the requirement to pay is quarterly.
Who does it apply too?
This system can apply to Individuals, Companies and SMSFs. Therefore, if you have all these types of entities within your structure, you could ultimately be required to pay for multiple instalments each quarter. The address on the letter or activity statement is the easiest way to identify which entity the instalment is in relation too.
What is it paying for?
In practical sense, the payment of these instalments cover the value of income tax owing in the quarter for which you are paying the instalment. For example, a July to September 2021 instalment relates to tax you are earning between July, August & September 2021.
The end goal of this system is to avoid having a hefty tax bill at the end of the year when you return is lodged and in ‘effect’, Pay your tax As You Go throughout the year.
How is it calculated?
The calculation is based on a formula using the information lodged in your most recent tax return. This does mean that the calculation can sometimes be outdated (i.e. too much or too little) for your circumstances so if you feel that is the case, you are welcome to reach out to your Accountant here at Empire and they can do a quick check to make sure you are paying the appropriate amount of instalment.
There is also an option to have your calculation based on a percentage rather than fixed amount. Given the complexity of the instalment system, we generally recommend clients go with the fixed amount but do know this option is available. In particular, it is particularly suitable for clients’ businesses that are seasonal and fluctuate significantly from quarter to quarter.
When does the value change?
Upon lodgement of subsequent tax returns, this can result in a change to your PAYG Instalment value being triggered. The ATO will notify you of this via letter which looks like this:-
This is generally where clients have a heart attack and either get on email or phone saying “eeeekkkk I cannot afford to pay that each quarter!! I’ll go broke!!” If only we had a penny for every time that happened (every quarter)!
The amount listed on this letter is split quarterly
From the example letter above, this means the quarterly amount to pay would be $2,025.
When must it be paid?
As mention a couple of times already, the Instalment is required to be paid quarterly.
If you are already on the system of Business Activity Statement (BAS) lodgements, then this instalment will be incorporated into this statement and grouped together with your GST and/or PAYG Withholding requirements.
If you are not on the BAS system, then you will be issued a separate Activity Statement that will provide notification that the instalment is required along with ways to pay (and options to change if required). This will be issued for the end of the December, March, June & September quarters.
How do I know I have to pay it?
Normally it would come via post direct to you, direct to Empire (and we send it on) or through your My Gov online portal.
Of late, this is where we have seen some issues as the ATO have changed the way the instalments are being notified to clients. We are no longer receiving notification for clients on their behalf, these notifications are either going direct to you via MyGov Portal OR it appears not being sent at all. The first you are aware of it is when you may receive an overdue letter or text message.
How do I keep on top of it?
The ATO are apparently working on a system to improve the communication flow for instalments. Here at Empire we are going to send out a quarterly email at the start of each quarter to remind you that you may need to login to your MyGov to find out your instalment value (particular if you are an individual with no BAS lodgements).
The other way is to set yourself a reminder say the 28th of each month following the end of quarter (due date for instalment) to make sure you have received and paid your instalment. These dates would be 28th January, 28th April, 28th July and 28th October.
If you need help finding or navigating your instalment, you can always reach out to the team at Empire who can help to locate this for you.
And that’s a wrap! Hopefully this information provides a bit more detail around the PAYG Instalment system. As always we are here to help so please do not hesitate to reach out if you have any further questions.