PAYG Is A Good Thing! Don’t Freak Out (The ATO Is Not Stealing Your Money) 

As a taxpayer, you may likely have come across the term pay-as-you-go (PAYG).

PAYG is generally a good thing, but there can be confusion between PAYG withholding and PAYG instalments, particularly if you’re an individual who is eligible for both.

So there’s no need to worry – the ATO is not stealing your money… well, more than their normal tax system anyway. Here’s how to distinguish between the two types of PAYG you may have encountered as a taxpayer.

PAYG Withholding

As an employer, you have a role in helping your payees meet their end-of-year tax liabilities. You do this by collecting pay-as-you-go (PAYG) withholding amounts from payments you make to:

• your employees
• other workers, such as contractors that you have voluntary agreements with
• businesses that don’t quote their Australian business number (ABN).

This is to assist in minimising the impact of your employee’s tax bill at the end of the financial year. If you’re an employee, there’s no need to worry about this amount – it is what is used to work out how much tax you may owe or be owed by the Australian Taxation Office at the end of the year.

Payments other than income from employment may also need tax withheld, including:

• investment income to someone who does not provide their TFN
• dividends, interest and royalties paid to non-residents of Australia
• payments to certain foreign residents for activities related to gaming, entertainment and sports, and construction
• payments to Australian residents working overseas
• super income streams and annuities
• payments made to beneficiaries of closely held trusts.

PAYG Instalments

Pay-as-you-go (PAYG) instalments are regular tax prepayments on your business and investment income. Think of it like the PAYG Withholding above, but for income that hasn’t had any withholding applied (by your employer for example).

The instalments are designed to help offset your tax bill at the end of the financial year by paying regular instalments as you receive the income. This way, you should not have a large tax bill when you lodge your tax returns.
However, the ATO system is quite crude…. and is based on the prior years tax liability. So, if your financial situation has changed, your expected tax may also change. This means your current PAYG instalments may add up to more or less than your tax at the end of the year. If your circumstances have changed, you should consult with your accountant to see if they should be varied.

When Do You Have To Pay PAYG Instalments?

If you are an individual (including a sole trader), you will automatically enter the PAYG instalments system if you have all of the following:

• instalment income (read income which withholding hasn’t been applied) 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.

A company or super fund will automatically enter the PAYG instalments system if any of the following apply:

• it has instalment income from its latest tax return of $2 million or more
• it has an estimated (notional) tax of $500 or more, or
• it is the head company of a consolidated group.

Holmans outline what we believe the upcoming instalments will be and when they will be payable as part of our standard tax letter. You should use this table to help manage your cashflow.

PAYG Varying Instalments

You can vary your PAYG instalments if you think your current payments will result in you paying too much or too little tax for the income year. Variations must be made on or before the payment due date (28 days after the end of each quarter, generally).

You need to be careful varying instalments though…. where your varied instalments are less than 85% of your total tax payable, you may have to pay interest on the difference, in addition to paying the shortfall tax. Depending on the circumstances there may also be penalties.

However, you do not have to vary your PAYG instalments at all. It will not change how much income tax you pay for the year, just the timing of payments and refunds.

After you lodge your tax return, if your instalments were:

• too high, the excess is refunded to you
• too low, you pay the shortfall.

Your varied amount will apply for all your remaining instalments unless you make another variation before the end of the income year.

You might need to vary your PAYG instalments if the 2022 floods or other disasters impacted you.

If you cannot pay your instalment amount, you should still lodge your instalment notice and discuss a payment arrangement with the ATO. You may wish to obtain advice from a tax agent (like us) on whether you should vary your instalments.

Disclaimer: This article contains general information only. Regrettably, no responsibility can be accepted for errors, omissions or possible misleading statements or for any action taken as a result of any material in this guide. It is not designed to be a substitute for professional advice, as such a brief guide cannot hope to cover all circumstances and conditions applying to the law as it relates to these items.