PKF "Break it down" - Pay-As-You-Go (PAYG)

What is PAYG?

Pay-As-You-Go requires tax payments as income is earned (not just on lodgement of an income tax return); imposed as Withholding and Instalments.

PAYGW is withheld by the payer and they remit it to the ATO (e.g. employers remit on behalf of employees; banks remit on behalf of investors who don’t provide their TFN; businesses remit on behalf of suppliers who don’t provide an ABN).

PAYG Instalments are payable by the taxpayer themselves as a collection mechanism as they earn (e.g. passive income, self-employed, companies etc).

Why does the ATO require PAYG?

Like any business – for the ATO, cash is king.

Just because a business issues an invoice doesn’t mean the client will pay it.

Just because the ATO issues a notice of assessment, doesn’t mean the taxpayer will pay it.

So they do what businesses do wherever possible – they ask people to pay in instalments.

Rather than wait to issue a tax bill of $5,000 at the end of a year, they estimate the amount payable and require payments out of each pay packet for employees, or monthly / quarterly PAYG Instalments.

When actual tax payable is calculated, amounts paid along the way are deducted from the final bill.

What are some tricks and traps?

The ATO have no real way of knowing how much you will earn in the next year, especially where your sources of income are unpredictable; they are forced to assume an amount similar to the prior year.

If you know your income will be significantly more or less, you are able to vary the ATO issued instalment up or down – however if you underestimate by more than 15% in any year, the ATO will apply penalties.

However, the ATO have wised up to inflation and don’t just take the prior year amount – they instead charge an amount that is GDP adjusted.

The ATO can only update your PAYG Instalments when you lodge your most recent tax return - e.g. your 2012 income tax return is not due for lodgement until say 15 May 2013. This means they can’t update your 2013 instalments until the June quarter. If your income increased significantly from 2011 to 2012, then there may be a ‘catch up’ payment, so the total amount paid by the end of 2013 is closer to the 2012 liability - e.g.

2011 tax liability of $10,000 – presume return lodged in July 2011.

Therefore quarterly instalments of $2,500 made in Sept 2011, Dec 2011, March 2012 and June 2012.

This means a total of $10,000 is paid towards the 2012 liability by June 2012. Perfect.

But then

2012 tax return not lodged until May 2013, showing a liability of $20,000.

$2,500 PAYGI paid for Sept 2012, Dec 2012 and March 2012 - so only $7,500 has been paid towards the 2013 liability.

When the $20,000 tax return is lodged in May 2013, the ATO realises they wanted $20,000 from you for 2013 – so June instalment increased to $12,500.

If you are entering the PAYG Instalment system for the first time, the ATO generally will only one quarter payment, not the full catch up amount.

What are the ‘warning signs’?

If a client receives more than $2,000 in business or passive income they are likely to be entered into the PAYG Instalment system.

How does it relate to the work we do for our clients?
Cashflow is all-important for our clients. We need to ensure that we can accurately forecast the amount of PAYGI they will be required to make so they can be prepared for these payments.

We also need to ensure clients are complying with the PAYGW obligations where appropriate.

For more information

https://www.ato.gov.au/Business/PAYG-withholding/