PAYG Instalments

Understanding and Choosing the Right Method for a Business

Pay As You Go Instalments or PAYG Instalments are implemented by the Australian Taxation Office (ATO) to help businesses and individuals meet their income tax obligations throughout the financial year. It is particularly relevant for businesses that expect to have a tax liability at the end of the financial year. PAYG Instalments require businesses to make regular payments toward their expected tax liability, which are credited against their annual income tax assessment.

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

1. Instalment Amount: Under this method, the ATO estimates 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 every quarter, equal to 25% of the ATO annual calculated amount. The ATO’s estimate is designed to align with your expected income, ensuring your payments are proportional to your earnings.
2. Instalment Rate: Under this method, the ATO estimates your expected tax liability based on your previous year’s income and tax return and develops a percentage of tax based on revenue. Businesses then make regular payments throughout the financial year based on this percentage calculated for the actual revenue generated. This method is good where income may be seasonal and varies each quarter. Your payments will then fluctuate with your actual income, ensuring a more precise contribution to your annual tax liability.

The option to choose between the instalment amount method or the instalment rate method is only available to be chosen on the first BAS of each financial year

Choosing the most suitable method for your business depends on various factors:

1. Income Stability: If income is relatively stable and consistent from quarter to quarter, the Instalment Amount method may be more convenient, as it simplifies payment obligations.
2. Income Variability: For businesses with fluctuating incomes, the Instalment Rate method offers flexibility by allowing adjustment to payments in accordance with actual earnings.
3. Accuracy: The Instalment Rate method may help avoid overpaying or underpaying tax as its calculation is based on the revenue generated. The greater the revenue the more the instalment calculated will be. The lower the revenue, the less the instalment calculated will be.

From the ATO

Case study 1: Kelly the DJ

Kelly is a DJ, working at festivals from November to January. She chooses to use the instalment rate method as it suits her seasonal business income.

Using the rate method means she needs to work out her business income each period. It helps her manage cash flow because the amounts she pays will vary in line with her income.

When Kelly receives her BAS or instalment notice, she calculates the instalment based on her income for that period, multiplied by the rate provided.

Case Study 2: David the plumber

David is a plumber with a regular monthly business income, so he chooses the instalment amount method. He won’t need to work out his business income each period to use this method.

David pays the instalment shown on his BAS. The amount is calculated from the information in his last lodged tax return.

Source: ATO – Which PAYG instalment method best suits your needs?