Pay As you Go (PAYG) instalments, are regular prepayments of tax on your business and investments income. If you earn income, over a certain threshold, from an investment or business, you will have to pay PAYG instalments. The amount you pay throughout the year is then offset against what you owe.
When you pay regular instalments throughout the year, your business will most likely not have a large tax bill to pay when it comes to lodging your tax return. This in turn helps you manage a healthy cash flow by budgeting your income tax.
What is the difference between PAYG Withholding and PAYG Instalments?
PAYG withholding is when an employer collects taxes directly from an employee or contractor's pay cheque and provides these to the Australian Taxation Office (ATO). By doing this, employers help individuals meet their income tax liabilities without the hassle involved.
When you apply for your ABN, you can register for PAYG withholding. You can also register using your GovID.
PAYG Instalments payments
Before you submit your tax return, you need to file your PAYG instalment income and activity statements. This ensures your tax assessment factors in the PAYG instalments you have already paid throughout the financial year. You should pay any remaining instalments before you file your tax return.
PAYG Instalment thresholds
The ATO will work out if you need to pay PAYG instalments based on the information you reported in your latest tax return.
If you are an individual, a sole trader, or a trust, you will automatically enter the PAYG instalments system if all of the points below apply to you:
- An instalment income (this is your gross business and investment income, excluding GST and any capital gains) from your latest tax return of $4,000 or more;
- Tax payable on your latest notice of assessment of $1,000 or more; and
- An estimated (notional) tax of $500 or more.
If you are a company or a super fund, you will automatically enter the PAYG instalments system if any of the following points apply to your business:
- An instalment income from your latest tax return of $2 million or more;
- An estimated (notional) tax of $500 or more; and
- If your business is the head of a company of a consolidated group.