If you have started getting PAYG instalment notices from the ATO and are not quite sure what they are or why you are suddenly paying tax before you lodge your return, you are not alone. Here is how it works.

1. What are PAYG instalments?

PAYG instalments are regular prepayments towards your expected income tax bill for the year. Instead of paying one large amount when you lodge your tax return, you pay it in instalments, usually quarterly, based on your business income as you earn it.

2. How is this different from PAYG withholding?

This is the mix-up we see most often. PAYG withholding is the tax you take out of your employees’ wages and send to the ATO on their behalf. PAYG instalments are about your own income tax, as a business owner or business. They are two separate systems that happen to share a similar name.

3. When does the ATO put you into the PAYG instalment system?

For individuals, sole traders, and trusts, the ATO generally enters you into the system once your latest tax return shows instalment income of $4,000 or more, and the tax payable on your latest notice of assessment is $1,000 or more. Companies and super funds are generally brought in once instalment income reaches $2 million.

4. Instalment amount vs instalment rate: what is the difference?

The ATO usually gives you a set instalment amount to pay each quarter, based on your last return. Alternatively, you can choose to calculate your own instalment using a rate applied to your actual current income, which can suit a business with income that varies a lot from year to year.

5. Can you vary your instalments?

Yes. If you expect your income for the year to be noticeably higher or lower than what the ATO has assumed, you can vary your instalment amount before you lodge, rather than waiting to sort it out at tax time. It is worth reviewing this if your business has had a genuinely different year.

6. Tips for managing PAYG instalments and cash flow

The main thing that catches business owners out is treating PAYG instalments as a surprise bill rather than planning for them. We help our clients build these payments into their regular cash flow planning, so quarterly instalments are expected rather than stressful. If you would like a hand reviewing your instalments, get in touch.