Pay As You Go Instalments

The Pay As You Go (PAYG) instalment system is designed to ensure that individuals pay their tax liability for their investment and business income during the year as a credit against their final tax payable. The system applies to individuals with:

	Gross investment or business income in excess of $2,000 on the last tax return lodged (excluding capital gains)v
	A tax liability of more than $500 on the last tax return lodged, and
	No entitlement to the Senior Australian’s tax offset.

For most individuals, PAYG instalments will be payable quarterly. However if you meet the following criteria you may elect to pay your PAYG instalment annually:

	Notional tax (tax on business and investment income excluding capital gains) is less than $8,000, and
	Not registered, or required to be registered for GST (including any partnership in which you are a partner).

Individual taxpayers are still required to lodge an income tax return each year. Please note that PAYG instalments are up-front payments of tax. Once the PAYG instalments have been raised by the Australian Taxation Office you will receive a credit on your tax return. A credit will be included on your tax return even if the PAYG instalment is not paid. The amount owing on an unpaid PAYG instalment will be a separate interest-bearing debt.

Payments for annual payers

The Australian Taxation Office sends payment notices in July to those who have elected to be annual payers. Payments of annual instalments are due on 21 October of the year following the financial year to which they relate. For the year ended 30 June 2008, the annual instalment is due on 21 October 2008.

If you are eligible to pay annually, the Australian Taxation Office will send you an election form. If you do not complete and lodge the election you will be required to pay your PAYG instalments quarterly. Having completed the election once, it is not necessary to make another election in the following year.

Payments for quarterly payers

Those individuals who have not elected (or are not eligible) to pay instalments annually will pay quarterly. Quarterly instalments are due on 28 October, 28 February, 28 April and 28 July of each year.

Calculating the instalment

There are two methods of calculating the tax instalment which are available to individuals who pay annually and quarterly. They are the instalment amount method and the instalment rate method.

Instalment amount method

Individuals paying according to this method will pay their instalment(s) based on the notional tax figure notified by the Australian Taxation Office. This amount is pre-printed on your payment form, which will be received in July if an annual payer, or every three months if quarterly. The amount is based on your most recently lodged income tax return. For quarterly payers, notional tax is increased by an uplift factor of 8%. This method is often preferred due to its simplicity.

Instalment rate method (Instalment rate x Instalment income)

Alternatively, the instalment rate method allows you to pay instalment(s) based on the actual income earned for the relevant period. The instalment rate is a percentage calculated by the Australian Taxation Office and is pre-printed on your payment form. It is based on the latest income tax return that was lodged. The amount payable is the instalment rate multiplied by the instalment income for the period, i.e. either for the entire year or for a three-month period.

Instalment income is the total gross income for the relevant period. It includes:

	interest on investments
	gross rent
	dividends (excluding franking credits)
	annuity income
	taxable superannuation fund pensions
	partnership & trust distributions, and
	royalties.

Any income for which tax has already been withheld (such as salary) is excluded, except if tax was withheld due to you not providing your TFN or ABN. Also excluded are:

	franking credits
	deemed dividends
	capital gains, and
	exempt income (for example, certain government payments).

Varying the PAYG instalment

It is possible to vary the instalment amount or rate as notified by the Australian Taxation Office if the instalment will clearly make you pay more than your expected tax liability. Caution is required when varying a PAYG instalment. If the variation results in you paying less than 85% of your actual tax liability for the year, you may be liable for interest on the underpayment. You may wish to contact us for assistance prior to varying an instalment.

Published : 18 September 2008