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How does the Pay As You Go (PAYG) Instalment System Work?

Clinton Ham - Wednesday, August 01, 2012

How does the Pay As You Go (PAYG) Instalment System Work?

The simplest answer to this question is that the PAYG instalment system is payments in advance to cover your expected tax liability on your business and/or investment income for the current financial year.

At the conclusion of the financial year your actual income tax liability is calculated. The instalments you have paid are then deducted from this amount and your assessment will be issued with the resulting tax refund or invoice for the remaining tax payable.

Example 1

Neville has investment income and is issued with quarterly PAYG instalments of $1,500 resulting in total instalments of $6,000. Upon preparation of his tax return Nevilles tax liability is calculated as $5,423. Nevilles refund will be calculated as follows:

Tax Liability

$5,423

PAYG Instalments Paid ($1,500 x 4)

$6,000

Tax Refund

$ 577

How is my PAYG Instalment amount calculated?

Your PAYG instalment is calculated based on the information lodged in your most recent tax return. The ATO calculate the tax you would pay on the business and investment income (excluding capital gains) , gross that tax up by the expected growth in GDP and issue the instalments based on the resulting figure.

Further information regarding how the ATO calculate your PAYG instalment is available direct from the ATO here.

Timing of payments in relation to your PAYG Instalment

After calculating your PAYG instalment based on the above rationale the ATO will then give consideration as to the timing of the collection of your instalment amounts. PAYG instalments are typically paid quarterly at the end of September, December, March and June.

If you enter into the PAYG instalment system only part way through the year your instalments will be higher so that the ATO can collect the full amount of their estimated tax by year end. This point can be best illustrated by further expanding on Example 1 above whereby Nevilles PAYG instalment is calculated as an annual figure of $6,000. Following are various examples of PAYG instalments based on lodgement date.

Date of Lodgement

First instalment due

September instalment

December instalment

March instalment

June instalment

Total

July

September

$1,500

$1,500

$1,500

$1,500

$6,000

November

December

$Nil

$2,000

$2,000

$2,000

$6,000

January

March

$Nil

$Nil

$3,000

$3,000

$6,000

June

June

$Nil

$Nil

$Nil

$6,000

$6,000

If you are already paying PAYG instalments and the amount of PAYG you are required to pay changes throughout the year the ATO will factor in the amounts already paid. Once again lets use the example of Neville who has an instalment amount due of $6,000 however he paid $200 in each of the first two quarters. His PAYG instalments would be as follows:

September instalment

December instalment

March instalment

June instalment

Total

$200

$200

$2,800

$2,800

$6,000

Can I change the amount of my PAYG Instalments?

Yes you can vary the amount of your PAYG instalment at any time before the due date for lodgement and payment of the instalment. Once the instalment is past is due date changes are not able to be made.

Should you have any queries in relation to your PAYG Instalment please dont hesitate to contact our office.






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