Pay As You Go (PAYG) Instalment is a system that puts aside portions of tax during the income year towards an entity's or individual's expected tax liability on business and/or investment income excluding GST. It includes gross sales, fees for services, interest and rent received, dividends, royalties, trust and partnership distributions. The actual tax liability is worked out at the end of the financial year when the annual income tax return is assessed. PAYG instalments paid during the year are credited against the assessment to determine whether the entity or individual owes tax, or is owed a refund.
The Australian Taxation Office (ATO) will contact entities and individuals who are required to pay PAYG instalments, notifying them of their instalment rate. This is calculated according to information from the previously assessed income tax return and on recent business activity statement. PAYG instalments may be included as part of an activity statement or a separate instalment notice may be issued.
The default option is for the instalment to be calculated as the instalment rate multiplied by business and/or investment income for the instalment period. The main advantage of this method is that instalments are based on income as the entity or individual earns it, instead of a projection based on the previous tax situation. Some entities and all individuals may however choose to pay an instalment amount calculated by the ATO, which is based on the most recent tax assessment plus an uplift factor. This decision needs to be made before the due date for payment of the first instalment for each financial year which will apply to the remainder of the financial year.
Entities and individuals can vary an instalment if they believe the instalment rate or the ATO calculated instalment will result in paying more or less than the expected tax liability for the financial year.
Corporate tax entities with annual turnover above certain a threshold are required to pay monthly PAYG instalments. Other corporate tax entities with turnovers below the threshold are required to pay quarterly instalments. The annual instalment option is available for companies if they meet the criteria that apply to individuals noted below with additional conditions.
PAYG instalments for individuals are generally paid quarterly. Annual instalment will be accepted by ATO if the most recent annual tax liability on business and/or investment income is less than $8,000 and certain other conditions are met. For more information see Introduction to annual PAYG instalments. Certain professionals e.g. artists, authors and sports professionals can choose to pay the instalment twice a year.
Partnerships and trusts are generally not required to pay PAYG instalments. However, special rules apply to partners and beneficiaries when calculating their own PAYG instalments.
PAYG instalments for superannuation funds are generally paid quarterly. Superannuation funds can choose to pay an annual instalment if they meet the criteria that apply to individual tax payers.
