How Does PAYG Installments Work
PAYG installments are designed for taxpayers who earn income that isn’t subject to PAYG withholding, including self-employed individuals, investors, and businesses. The process begins with notification, where the ATO informs eligible taxpayers of their PAYG installment obligations. Eligibility is determined by the amount of income earned from business or investments that are not subject to withholding, such as income from self-employment, rental properties, dividends, and capital gains. After lodging their tax returns, eligible taxpayers receive a notification from the ATO regarding their PAYG installment obligations.
1. Notification
Eligibility: Taxpayers become eligible for PAYG installments if they earn a significant amount of income from business or investments that isn’t subject to withholding. This includes income from self-employment, rental properties, dividends, and capital gains.
Notification: The ATO will send a notification to eligible taxpayers for their PAYG installment obligations after their lodgment.
Set Amount Determined by the ATO: The ATO calculates a fixed installment amount based on the taxpayer’s previous tax return. This amount is an estimate of the taxpayer’s expected tax liability for the current year.
Simplifies Payment: This method simplifies the payment process by providing a consistent amount to be paid each period, making budgeting easier for the taxpayer.
Installment Rate
Percentage of Actual Income: Alternatively, taxpayers can choose to calculate their installments as a percentage of their actual income for each period. The ATO provides the installment rate, which is based on the taxpayer’s previous tax return.
More Accurate: This method can be more accurate as it adjusts to fluctuations in the taxpayer’s income. If income varies significantly throughout the year, the installment rate method ensures that payments are aligned with actual earnings.
Quarterly Payments: Most taxpayers will pay their PAYG installments on a quarterly basis. The ATO sends an activity statement at the end of each quarter, which includes the installment amount or prompts the taxpayer to calculate their installment based on their income.
Annual Payment Option: Some taxpayers may be eligible to pay their PAYG installments annually for low installment obligators. The annual installment amount is calculated by the ATO and is usually due in March of the following year.
Lodging Activity Statements: Taxpayers are required to lodge an activity statement with the ATO for each installment period. This statement includes details of the income received and the installment amount payable. Activity statements can be lodged online via the ATO’s Business Portal, through a tax agent, or by mail.
Due Dates: Quarterly installments are typically due on 28 days after the end of each quarter.
The ATO notifies eligible taxpayers of their PAYG installment obligations.
2. Calculation of Installments
Taxpayers can choose between two methods for calculating installments: Installment Amount
3. Payment of Installments.
Installments are typically paid quarterly, although some taxpayers may have the option to pay annually.
