Navigating PAYG Instalments - PAYGI

Managing your business's tax obligations is crucial for the survival of your business. The Pay As You Go (PAYG) Instalments system is designed to help businesses and individuals stay on top of their tax liabilities throughout the year.

PAYG Instalments serve as a proactive approach to tax management. The Australian Taxation Office (ATO) calculates these instalments based on an estimated annual tax liability which they obtain from the most recently lodged Tax Return for the business.

The business is then instructed by the ATO to make regular quarterly payments throughout the financial year, for the CURRENT financial year.

Let's recap on that - PAYG Instalments are quarterly payments of the current years income tax for your business, based on the most recently lodged Tax Return for your business. The idea being, that 1) your businesses income tax payable amount for the current year will be similar to the previous year, and 2) that if you pay in quarterly instalments for the current year as the year progresses, you will have mor or less paid up by the end of the year.

It is cruicial that business owners understand PAYGI. Here are some tips to help:

1. The PAYGI amount payable is based on the most recently lodged tax return. If your profit in the current year is increasing from the previous year for which the tax return was lodged, you will need to ensure you put aside sufficent funds to pay the extra tax once your current year tax return is lodged.

2. When that current year tax return is lodged, with the increased tax payable from the previous year, not only will you have a 'top up' amount of tax to pay, but this tax return lodgement will then adjust the next financial years PAYG Instalments.

3. If that tax return was lodged in May, the latest time to lodge, your adjusted PAGYI amount for the year will fall into the final quarters BAS and if your business has grown this could cause substantial tax payable on your last instalment, as well as having to pay your top up tax from the previous year.

Have you followed? No? Let me provide an example with years and months thrown in to help.

Mrs X has started a new business as a company in FY2023. The financial year ends in June 2023 and in September her accountant prepares the company tax return for her. The accountant informs her they can hold lodgement until May 2024 so she doesn't have to pay the tax until then. The tax payable will be $4000.

In May 2024 the accountant lodges the tax return. Mrs X now has to pay the $4000.

The ATO system is triggered by the tax return for FY2023 with $4000 to pay and calculates PAYG Instalments for FY2024.

Based on the FY2023 tax return the ATO calculate tax payable of $4000 for FY2024.

The ATO system wants to split the FY2024 estimated tax payable of $4000 across the 4 quarterly BAS for FY2024, which would be a PAYGI amount of $1000 for each quarter. BUT, the September 2023, December 2023, and March 2024 BAS have already been lodged. So, the system puts the full amount onto the June 2024 BAS.

Mrs X now has to pay another $4000 of estimated tax for FY2024. Essentially, Mrs X is required to basically pay two years worth of income tax in one go. If she wasn't aware of this and had not put the funds aside, it could really hurt a new business, their cash flow and ability to pay the ATO.

Following this, the PAYGI amounts should settle down to a regular amount. But, this can catch business owners out who are either new in business and not aware of the PAYGI system or how it works, business owners whose accountants are not keeping them informed of the estimated tax liabilities and how lodgements, or holding off on lodgements, will affect the PAYG Instalments.

PAYGI can be a confusing system for those who haven't had it explained to them in a logical way. We hope this example helps.