If you’re a business owner or sole trader in Australia, chances are you might have come across the term PAYG-which means Pay As You Go instalments. Understanding how this system works will help you stay on top of your tax obligations and avoid any surprises at tax time. The following beginner-friendly guide will take you through the very basics of PAYG instalments: what they are, how they work, and important terminology to know, including instalment activity statements, notional tax, and PAYG instalment notices.

What Are PAYG Instalments?

PAYG instalments are a tax payment system administered by the ATO. They enable individuals and businesses to pay their expected tax obligations in instalments throughout the year, rather than in one lump sum at the end of the financial year.

Why Is PAYG Important?

• Assists businesses in managing cash flow.
• Reduces the risk of large tax debts.
• Ensures tax payments are made progressively.

PAYG instalments apply to taxpayers whose income comes other than from regular wages, such as business income, rental income, or investment income.

How Does PAYG Work?

PAYG instalments are calculated based on your income from the previous financial year or your current year’s earnings. You can pay them quarterly, monthly, or annually, depending on your business structure and income.

Here’s how the system works:

Eligibility: The ATO determines if you are required to pay PAYG instalments, based on your last tax return. 

Notification: If you’re eligible, the ATO will send you a PAYG instalment notice or include it in your instalment activity statement (IAS). 

Payment Options: 

• ATO’s Calculated Amount: Pay a fixed amount that the ATO works out from your previous income. 
• Your Calculated Amount: You estimate your current year’s income and calculate the instalment.

Payments: Pay instalments on the due date as shown on your IAS or PAYG instalment notice.

What Is an Instalment Activity Statement (IAS) ?

An instalment activity statement is a form the ATO issues to those taxpayers who are required to lodge PAYG instalments but who are not registered for GST. An IAS shows:

• The amount of PAYG instalment payable.
• Other obligations not related to GST, including PAYG withholding for employees.

Generally, you will lodge one instalment return each quarter, and these can be lodged electronically via the ATO’s online services or through your tax agent.

Understanding PAYG Instalment Notices

An instalment notice is generated by the ATO for PAYG taxpayers. It will inform you of your instalment amount and the due date.

Key Features of a PAYG Instalment Notice:

• Pre-populated payment choices.
• Choice to pay as calculated or revise based on estimated income.
• Information about how to lodge amendments if necessary.

Failure to take note of these may attract some penalties, hence the need to act on them as soon as possible.

What is Notional Tax?

Notional tax is an estimate the ATO makes from your previous year’s income. This amount forms the basis of your PAYG instalment for the income year.

How Is Notional Tax Calculated?

• The ATO examines your prior financial year taxable income.
• They estimate the tax payable and then divide it into instalments for the current year.

The notional tax gives you a starting point for your PAYG instalments. However, if your income varies, you may well adjust this amount.

Benefits of PAYG Instalments

• Cash Flow Management: The payments of tax are apportioned into manageable portions.
• Avoiding Large Tax Debts: Avoids end-of-year surprises for large sums of tax.
• Flexibility: You can vary instalments if your income changes significantly.
• Compliance: Ensures you meet your tax obligations throughout the year.

How to Adjust PAYG Instalments

If your income has changed significantly compared to the previous year, you may need to vary your PAYG instalments.

Steps to Adjust Your Instalments:

1. Log in to the ATO’s online services.
2. Navigate to your instalment activity statement or PAYG instalment notice.
3. Select the “vary” option and enter your updated income estimate.
4. Submit the variation before the due date.

Common Mistakes to Avoid with PAYG Instalments

1. Failing to Pay on Time: Late payments can result in penalties and interest charges.
2. Not Adjusting Instalments: Overpaying or underpaying due to incorrect income estimates.
3. Ignoring Notices: Missing important updates from the ATO.
4. Confusing IAS with BAS: Ensure you understand the difference if registered for GST.

Who Needs to Pay PAYG Instalments?

The ATO will contact you with a letter if you are required to pay PAYG instalments. You will be required to pay PAYG instalments if you are:

• A sole trader.
• Businesses earning more than the threshold income.
• Individuals with significant investment income.

How to Set Up PAYG Instalments

If you’re new to PAYG instalments, here’s how to get started:

1. Register: Use the ATO’s online portal or contact your tax agent.
2. Receive Notification: Wait for the ATO to send your first instalment notice.
3. Choose Payment Method: Decide between the ATO’s calculation or self-estimation.
4. Lodge Your IAS: Submit your instalment activity statement by the due date.

Conclusion

PAYG instalments can be complicated at first, but if you know the basic concepts, it becomes easier. If you keep track of your instalment activity statements, respond to PAYG instalment notices, and know key concepts like notional tax, you will find meeting your tax obligations without much hassle.

Whether you’re a business owner or a sole trader, proper PAYG instalment management is essential for maintaining financial stability and compliance with Australian tax laws.