If you own a business you may need to pay income tax during the year much like an employee pays tax from their salary or wage. This tax system is called Pay As You Go (PAYG) Instalments.
Before we go any further, it is important to understand that Pay As You Go (PAYG) Instalment tax is not the same as Pay As You Go (PAYG) Withholding tax. Many business owners find this confusing due to their almost identical names. Rest assured that PAYG Instalments and PAYG Withholding are different taxes. If you are confused by the similar names, this article explains the differences between them.
Do I Need to Pay PAYG Instalments?
The Australian Tax Office (ATO) will decide whether you need to pay PAYG Instalments. The ATO will base their decision on the last tax return you lodged with them. If you do need to pay PAYG Instalments, the ATO will inform you in writing.
If you are an individual or trust, you are required by the ATO to pay PAYG Instalments if any of the following are true:
- You voluntarily opt in to the system because you expect to make a profit on your business and/or investments
- You reported $4,000 or more of gross business and/or investment income on your last tax return
- The tax payable on your last notice of assessment is $1,000 or more
- Your estimated tax payable for the current financial year excluding capital gains (i.e. notional tax) is $500 or more
- You are not entitled to the seniors and pensioners tax offset
If you are a company or super fund, you are required by the ATO to pay PAYG instalments if any of the following are true:
- The instalment rate calculated by the ATO is more than zero percent and your notional tax is $500 or more
- Business and/or investment income excluding capital gains in your most recent income tax assessment is $2 million or more
- You are the head of a consolidated group
If you are a partnership, primary producer or consolidated group you can find out about PAYG Instalment rules for your business by following the links on this page of the ATO’s website.
How Do I Pay PAYG Instalments?
Once you are in the system, the ATO will notify you whenever an instalment is due. Instalments are usually reported and paid to the ATO via BAS Returns or PAYG Instalment Notices.
At the end of the financial year, you will complete a tax return for your business. If you have not paid enough tax during the year through instalments, you may need to pay some more. If, however, you have paid too much tax during the year, you may receive a refund.
Plan for Success
Sometimes business owners do not pay enough tax during the financial year through their PAYG Instalments. To save yourself from having to pay a lump sum to the ATO at the end of the year, it is a good idea to have a planning session with your tax accountant.
At various times during the year, your accountant can estimate your full-year tax position. Depending on their calculations, you may choose to increase the amount you pay through your PAYG Instalments.
If your business is doing well, be sure to do some careful tax planning and save yourself the pain of having to pay a lump sum to the ATO at the end of the financial year.