Pay as you go (PAYG) instalments – What is PAYGI?
Pay as you go (PAYG) instalments applies to small business or investment income of any entity – Sole Trader, Company, SMSF etc. Pay as you go (PAYG) instalments are regular payments made throughout the year to avoid payment of large tax bill when tax return is lodged at the end of the year. The instalments made are based on business and/or investment income. The payments made during the year will be offset against the tax owed, if any, for the year.
ATO estimate the tax payable in a year by taking the business and/or investment income reported in the most recently lodged tax return. Instalments amounts are calculated based on this income, current income tax rates and likely changes in the economy. The instalment amounts can be changed by the taxpayer if they expect a different income than previous years but will be penalized if the payment falls short.
PAYG Instalments are reported and paid through activity statements or Instalment notice. They should be lodged before the tax returns are prepared. Once lodged, it will create a debit entry (debt) in the Activity Statements with the ATO. If the return is not filed on time, ATO might accept the instalment amount on their own in certain situations. Taxpayers must pay attention to the communications received from ATO regarding this.
What happens when PAYG Instalments are paid?
When a payment is made, it shows as a credit entry in the Activity Statement report offsetting the debit entry created while lodging the return. The balance will be zero. When the tax return is prepared, the tax payable on taxable income will be reduced by the amount of PAYG Instalments reported during the financial year. If the tax owed to ATO is less than the Instalment amount, the balance will be refunded.
Example: –
Total PAYG Instalments of John for the year – $10,000
Tax on taxable income – $10,500
Since John has lodged the PAYGI return and paid the same, he will be liable to pay only the balance $500 at the end of the year.
If his tax on taxable income was, say, $9,500, he will receive a refund of $500.
What happens when PAYG Instalments are not paid?
If the PAYG Instalments are not paid, it will continue as a debt in the Activity Statement report of ATO. However, the tax return will still be prefilled with the actual lodged instalment amounts and this amount will be deducted from the tax payable for the year. Taxpayers should be very careful in this situation. The tax payable will be understated or refund receivable will be overstated here. If tax is payable (even after reducing the PAYGI amount, which was not paid), the payable amount will be shown as debt in ‘Income Tax Statement’ of ATO and the PAYGI amount will be shown as debt in ‘Activity Statement’ report of ATO. If the result is a refund (after reducing the PAYGI amount, which was not paid), it will be used by ATO to setoff the PAYGI debt and taxpayer will only receive the rest of the refundable amount, if any. If the refund is not enough to setoff the PAYGI debt completely, the balance will show in the Activity Statement report.
Example: –
Total PAYG Instalments of John for the year – $10,000. He lodged the returns, but never made payments.
Tax on taxable income – $10,500
Since John has lodged the PAYGI return, he will be liable to pay only the balance $500 as income tax at the end of the year. However, he will be liable to pay the PAYGI of $10,000 and will be shown as a debt with ATO in Activity Statement Reports.
If his tax on taxable income was, say, $9,500, his tax return will show a refund of $500. However, he will be liable to pay PAYGI $10,000 and will be shown as a debt with ATO in Activity Statement Reports. ATO will setoff the refundable $500 with this debt and John will be liable to pay the rest $9,500.
The scenario is similar for other entities like Sole trader, Company, SMSF etc. For more information refer ATO website.
Looking for an accountant, S & H Tax Accountants can help. S & H Tax Accountants offer all taxation services whether it be for individuals, companies or even trusts. However we also offer business services, such as registrations or Business Activity Statement (BAS) and even PAYG Installments. We understand that for businesses, these can tasks can be very daunting, that is why we offer the best level of services possible to all of our clients. Our team consists of well-qualified, vastly experienced and extremely professional individuals. Book an appointment today, call us on 03 8759 5532 or you can email us on info@sahtax.com.au.