Overcome Your Tax Complications With PAYG
What is PAYG Installment?
Many business owners find it difficult to pay large taxes and comply with ever-changing tax-filing regulations. PAYG or Pay as you go installments make it a lot easier for you to manage your income-tax payments. Let’s have a better look into what PAYG installment is all about.
When the income you are making from your business and other investments reaches a certain threshold, you pay your income tax amount in installments. These payments are usually made every quarter. This way, you can avoid large tax bills when you file your income tax return.
Although you would still have to file an annual income tax return with PAYG installments, PAYG installments can help you plan your income tax and maintain good cash flow.
And finally, when you file your tax return, all the PAYG installments you have paid throughout the year are offset with the tax amount you will have to pay for that year.
There are usually two options available to pay your PAYG installments, including Option 1 and Option 2. They can be quite valuable in easing your tax return preparation.
To get a better understanding of both the options, take a look at each option separately.
Installment Option 1
Paying by Installment amount is the first option. It is quite simple and doesn’t require much of the lengthy calculations on your part. You would simply have to pay the amount calculated by ATO (Australian Taxation Office). The amount is estimated based on the information and figures submitted by you in your last income-tax return. You are eligible to pay installments using Installment option 1 if you are:
- An individual (including sole dealers)
- A trust
- A super fund paying annually and has business and investment income of $2 million or less.
- A company paying annually, with business and investment income of $2 million or less and with an accumulated turnover below $10 million.
Installment Option 2
It is about making payments using the installment rate. It is not very difficult, very much like when you calculate simple interest. ATO will provide you with an installment rate, and you would have to calculate installment payment using the rate of installment (%) and your installment income.
Options 2 has a slight edge over option 1 as your option 2 PAYG installments would be based on your actual income and not an estimate based on your last income tax return (like in option 1). For many whose income varies throughout the year, option 2 is more preferable.
You can pay using option 2 if you are a super fund or a company with a business and investment income of more than $2 million, and you do not come under the category of small-size business entity.
If you are eligible to pay PAYG installment, the tax office will send you a notification with an installment rate, which will be calculated based on your last income tax return. You are most likely to get an installment rate if you are an Australian resident, and your reported gross business/investment income was $2000 or more on your last tax return. Or the tax you paid on your last tax return was more than $500.
PAYG system is applicable for those who come under the category of the company, super funds, trust, partnerships, beneficiaries, installment system applies to companies, super funds, trust beneficiaries, partners, or individuals with business income.
Varying PAYG Installment amount
This is the tricky part. What if you think you are paying a too high or too low amount of tax for the year? Would you wish to vary your installment amount then?
You can file any number of your variations on your business activity statement (BAS) or installment notice. However, they need to be filed on or before the due date of your installment, or, before you file your annual tax return.
You don’t have to vary if the installment rate or amount calculated by ATO results in you paying more tax. Then, you will receive a refund of the excess tax amount. If you are paying less, you can pay the balance amount after your tax assessment.
PAYG installments help in reducing the burden of large tax liability assessments at the end of the year. With regular payments, you will be better equipped to maintain a healthy cash flow in your business or investments. Not only that, with PAYG, but you will also have more accurate tax amounts, automate payments, reduce audit errors, and, most importantly, keep a better focus on your business and investments.