The PAYG instalment system allows a business to spread its income tax liability across the tax year. This helps with cash flow, but also means the business is not faced with a large tax bill after the end of the tax year.
Most businesses lodge and pay instalments quarterly. Primary producers and special professionals (eg artists, actors and musicians) may be eligible to pay just 2 instalments (the third and fourth instalments). Businesses with instalment income of more than $20 million are required to lodge and pay monthly. Some businesses may pay one annual amount.
Small and medium businesses (ie businesses with an aggregated annual turnover under $50 million) generally have 2 options to work out a quarterly PAYG instalment.
Option 1 – using the instalment amount. The ATO calculates the amount of each instalment from information reported on the business’ latest tax return. This is the simplest option as the business doesn’t need to work anything out.
Option 2 – using the instalment rate. The business works out its instalment amount by multiplying its instalment income by the instalment rate provided by the ATO.
If your business thinks that its next instalment will be relatively too high or too low when compared to its estimated tax liability for the current tax year, it can vary the instalment on its next activity statement (BAS). A business can vary its instalment amount or rate more than once each tax year.
Now is a good time to check that your business’ PAYG instalments still reflect its expected end of year tax liability.
Be careful not to underestimate your PAYG instalment amount, income or rate. If you vary your instalments downwards, and it turns out you have a significant tax shortfall at the end of the year (15% or more), you may be charged interest.
However, if your business is affected by COVID-19 or a natural disaster (such as the recent floods in NSW and Queensland), the ATO will not charge interest if the business has made its best attempt to estimate its end of year tax liability.
Talk to us if you want to consider varying a PAYG instalment.