If the taxpayer is earning from business and/or investment activities, it may be necessary to pay a regular amount by instalment to ATO for the total tax amount to be expected at the end-of-the-year. This instalment system is called Pay As You Go Instalment (PAYGI).
However, PAYGI does not exempt the taxpayer from lodging an annual tax return.
How To Know If I Have To Pay Tax Instalment Under PAYGI?
ATO will notify the taxpayer if they are required to pay tax instalments. Moreover, other supporting documents for your instalment including activity statement or instalment notice will be sent before the payment deadline.
Lodging and Managing PAYGI:
If the taxpayer has myGov account which is linked to ATO, all the PAYGI processes including making payments, viewing your instalment status, making any changes, and managing your account can be done via this account.
Details of PAYGI Payments:
There are two main ways to figure out whether the taxpayer must pay instalment and if so, when and how much:
1. Automatic entry: When the taxpayer lodges his/her first income from business or investment activities, ATO will automatically inform the taxpayer about the eligibility, conditions, amounts, and deadlines of PAYGI.
2. Voluntary entry: Taxpayers can voluntarily apply for PAYGI instalment and estimate the instalment tax payable if according to their personal estimation, their business and/or investment income will be more than the annual threshold ($4,000 for residents, and $1 for non-residents).
When instalment notice is sent by ATO, the following terms may seem unfamiliar that we explain here:
- PAYG instalment rate: It is the rate estimated by ATO that, according to the taxpayer latest tax return, seems reasonably close to the actual tax rate if all tax was supposed to be paid at the end of the year.
- National tax: It is the sum of all instalments which equals to the approximate amount of the total tax to be paid for the taxpayer business and/or investment activity.
Note: This amount excludes the possible tax to be paid on capital gains.
- National tax adjusted for GDP: To have a more accurate estimation of total tax to be paid during the year, ATO adjusts instalments and notional tax amounts by the amount of changes in Australian gross domestic product (GDP).
- Instalment amount: This is the instalment amount to be paid and is calculated as below:
(PAYG instalment rate * notional tax adjusted for GDP) / (number of instalment periods)
- Instalment periods: Depending on the taxpayer circumstances, the instalment period can be monthly, quarterly, or semi-annually (two instalments per year). The exact period will be informed upon receiving the instalment notice.
Changing PAYGI amount:
Generally, the taxpayers are advised not to vary the instalment amount which is advised by ATO. If the taxpayer applies to change the instalment amount and the total amount of tax paid during the year is less than 85% of the actual tax, the taxpayer is obliged to pay interest on this difference.
Two options are available to change the instalment payment:
1. Changing the instalment amount: After estimating the tax payable for the year and calculating the quarterly instalment payable, the taxpayer can pay the revised instalment amount and fill up the instalment notice or activity statement accordingly. This process can be done online via the taxpayer myGov account.
2. Modifying the instalment rate: If the taxpayer instalment rate is measured by his/her own calculation, he/she can align the instalment rates to the rates notified by ATO through the following steps:
a) Estimate the business and/or investment income and calculate the tax payable for the whole year according to the previous rates.
b) Calculate/ apply the revised tax rate for the estimated business and/or investment income and measure the revised instalment amounts.
c) Subtract step (a) from (b) to work out any possible tax credit resulted from the changes in tax rates.
d) Fill up the revised instalment amounts and rates in the instalment notice or activity statement.