Ever wonder why the ATO sneaks an extra amount to pay into your BAS?

PAYG income Tax instalments

If the ATO thinks that your business will be profitable for the year, and therefore will need to pay income tax, they can require you to pay PAYG income tax instalments via your BAS.  This is the mysterious amount that ” Appears” on your BAS each quarter that has nothing at all to do with GST. The ATO make this assessment based on the last income tax return that you have submitted for your business.

Pay As You Go Instalments or PAYG Instalments are implemented by the ATO to help businesses and individuals meet their income tax obligations throughout the financial year.  PAYG Instalments require businesses to make regular payments toward their expected tax liability, which are then credited against their annual income tax assessment.

Don’t get this confused with PAYG tax withholding ( the ATO love to try and trick us by using the same words…) PAYG tax withholding is the tax that you withhold from your employees wages – this is ALSO on the BAS and ALSO includes the word PAYG!!!

There are two primary methods to calculate and pay PAYG Instalments:

  • Instalment Amount: Under this method, the ATO provides an estimate of your expected tax liability based on your previous year’s income and tax return. Businesses then make regular, pre-determined payments throughout the financial year, generally on a quarterly basis. The ATO’s estimate is designed to align with your expected income, ensuring your payments are proportional to your earnings.
  • Instalment Rate: This method allows businesses to calculate their own PAYG  Instalments based on their actual income and business activity. You are required to estimate your expected income for the current financial year and apply the applicable instalment rate, which can vary based on your business type and circumstances. Your payments will then fluctuate with your actual income, ensuring a more precise contribution to your annual tax liability.

How do you choose which method is best for your business?

  • Income Stability: If income is relatively stable and consistent from year to year, the Instalment Amount method may be more convenient, as it simplifies payment obligations.
  • Income Variability: For businesses with fluctuating incomes, the Instalment Rate method offers flexibility by allowing adjustment to payments in accordance with actual earnings.
  • Accuracy: If a business can make reasonably accurate income projections, the Instalment Rate method may help avoid overpaying or underpaying tax.

If your business circumstances change during the year and you want to reflect this change in your PAYG instalment, you need to discuss this with your Tax Agent. There are penalties for “underpaying ” your PAYG income tax so it is best to seek advice. Once your tax agent gives you the green light go ahead, your friendly BAS agent ( me) can update this on your BAS and change the amount that you need to pay. Some good info to keep in mind if things get tough.

If you would like to learn more about PAYG instalments please don’t hesitate to call me for a chat or send me an email.

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