The Pay As You Go (PAYG) instalment system requires certain taxpayers deriving business or investment income to pay instalments progressively towards their income tax liability. These instalments are prepayments of your expected income tax for the year. PAYG Instalments paid during the year are credited against your income tax liability when your tax return is lodged.

The calculation of these PAYG instalments, and the number of instalments required in a year, is dependent upon a taxpayer’s circumstances. Taxpayers can vary the amount of a PAYG instalment if the total does not reflect their expected income tax liability for the year.

A taxpayer only needs to pay PAYG instalments if they have been notified by the ATO. However, voluntary registration to the PAYG Instalments System is available.

Taxpayers are automatically entered into the PAYG Instalments System if their instalment income (business and investment income, excluding GST and any capital gains) is above the ATO’s entry thresholds.

Individuals (including sole traders) are automatically entered into the PAYG Instalments System if they have all of the following:

• Instalment income of $4,000 or more from your latest tax return lodged;
• Tax payable on your latest notice of assessment of $1,000 or more;
• Estimated (notional) tax of $500 or more.

Companies and superfunds are automatically entered into the PAYG Instalments System if any of the following apply:

• Instalment income of $2 million or more from your most recent tax return lodged;
• Estimated (notional) tax of $500;
• If the entity is the head company of a consolidated group.

The ATO will issue a letter to taxpayers when they have been enrolled into the PAYG Instalments System.

A new business will not be entered into the PAYG instalment system until its first income tax return has been assessed. Taxpayers that are new to business can start voluntary PAYG instalments to help smooth out their cashflow and avoid a large tax bill in their second year of business.

Taxpayers may be required to make PAYG instalments on a monthly, quarterly or annual basis. The ATO will advise a taxpayer of how often they need to pay PAYG instalments at the time they are first entered into the PAYG instalment system. However, most taxpayers make PAYG instalments on a quarterly basis.

Disclaimer: The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek independent professional advice.