Do PAYG instalments take the pinch out of your annual taxes? Kym Nitschke of Nitschke Nancarrow in Adelaide explains how this system works.
Many business owners, subcontractors and investors can relate to the same mortal fear: facing a tremendous tax bill at the end of the year. When you don’t have taxes taken out of your earnings like other wage workers, it can be tricky to figure out what you owe.
Through the Australian Tax Office, we have a method for paying taxes annually in a way that lets us avoid the unpleasant surprise. PAYG instalments are the solution.
What Are PAYG Instalments?
PAYG instalments (Pay As You Go) are payments made in advance to the ATO which count towards the coming year’s tax bill. Paying in advance keeps your bill smaller than it would be otherwise. What if you pay too much over the course of a year? Don’t worry, you’ll get the difference back in a refund.
Who Needs to Pay PAYG Instalments?
PAYG instalments are generally paid by business owners, investors and sub-contractors who earn over the tax threshold as they do not get tax withheld by their employer as wage earners do. However, if you are a company or have a superfund, you will also need to pay instalments if you made a profit in the previous year.
Instalments are calculated based on the tax return you lodged last year with the ATO. As soon as the prior year is lodged, the instalment amount will change.
The ATO will notify you if you need to start paying by instalments under the PAYG instalment system. Before your PAYG instalments are due, the ATO will also send you an activity statement or instalment notice.
As an individual (including if you’re in business as a sole trader), you can view, lodge, pay, vary and manage all your PAYG instalment obligations online. Alternatively, you can contact your tax agent for help.
It is important to bear in mind that if you have closed your business during the year or have seen a dramatic downturn in profit it is possible to vary your instalments to nil. This will only defer the tax payable to the following year.
Contact us to find out more by calling on (08) 8379 9950 or by sending me an email.
– Kym Nitschke