PAYG income tax instalments are designed by the ATO to ensure taxpayers’ submit regular instalments of their expected annual income tax liability.
These instalments apply to both individuals and businesses, who must pay their tax based on their estimated income throughout the year; and at rates determined by the ATO.
For salaried individuals, PAYG tax is withheld by employers, while self-employed traders and other businesses must pay their instalments quarterly via their BAS returns.
PAYG instalments are quite different to PAYG withholding tax.
PAYG withholding tax only applies to salaries and wages, while PAYG instalments deal with a business’s estimated tax liability, or income from investments.
However, your final PAYG income tax liability is only carried out when your income tax return assessment is made.
It is also possible to vary your PAYG instalments if you think your estimated income amount or tax rate is too high (or too low) for the year.
This may even mean you receive your refund sooner rather than later, especially if lodging your tax return in July is not a priority.
The PAYG instalment income is calculated from the two following options:
This is the simplest option for PAYG tax calculation, as the tax instalment is calculated on your latest tax return
Here the tax instalment is calculated either according to the instalment rate provided by the ATO, or from your own instalment income.
For most taxpayers, the second option usually works better, as it enables the income instalment to change as the income rate is applied for each period.
To make things easier, your eligibility options are shown on the instalment notice or activity statement.
But always remember to follow the same option of instalment calculation that you first selected, for the whole financial year.
This option can only be changed in the first activity statement of the next financial year.
Some taxpayers know how to take advantage of the PAYG variation.
However, there are some taxpayers who fail to do so, such as the example of someone with negatively-geared investment properties who expected $26,000 refund after lodging their tax return.
Unfortunately, because they did not take advantage of the PAYG variation, they effectively paid an extra $1000 per fortnight in tax.
This money would have been better parked in their offset account – saving them considerable interest on their mortgage.
Varying instalments is also important, as is not underestimating your PAYG instalment amount, income or rate.
If the value of the varied instalments is less than 85 percent of the total, you may also be subject to interest on the difference, as well as any penalties imposed by ATO.
There is no limit to the number of variations you can make but, remember, they must be lodged.
At Tax Return Perth, we can help you save the most money on your tax liability – whether it be on your business or investment income. Our team of experienced tax return agents can supply you with expert advice at an affordable, quoted price.
For a free consultation, please contact us today.