Tax tips, business, payg instalments, ato, small business, startups

A PAYG Instalment forms part of a small businesses BAS (Business Activity Statement). But what exactly is a PAYG Instalment? And when do you need to pay it for your business?

What is a PAYG Instalment?

A PAYG Instalment (or Pay As You Go Instalment) is the ATO’s way of making us prepay our income tax during the year for our Business.

When do you pay PAYG Instalments?

When you lodge your Income Tax Return for your small business, any PAYG Instalments paid during the year will be a credit against the Income Tax calculated. So by prepaying your tax it will help to reduce or avoid those lumpy tax payments at the end of the year, which no business wants!

A PAYG Instalment amount is calculated based on your previous tax return lodged. So, if you paid some tax last year for your business, it is likely that you will have to pay PAYG Instalments this year. However, if it is your first year of operation you won’t pay PAYG instalments, as you haven’t lodged your first tax return yet. Also, if your business was in a tax loss position last year, you will not pay tax instalments as the tax payable last year was nil.

How do I know if I need to pay PAYG Instalments?

Once you have lodged your tax return the ATO will send you a letter informing you whether you need to start paying PAYG instalments. This is paid through your BAS every quarter. Two payment options will be given to calculate how much you need to pay:

  • PAYG Instalment Amount (this is a fixed dollar amount they provide)
  • PAYG Instalment Method (this is a % that you apply to your income)

The importance of budgeting your tax payments

Whilst PAYG Instalments are a great way to ensure that you have money set aside for tax, it is important that even if you have not entered the PAYG Instalment system yet (i.e. because it is your first year of trading or you made a loss last year) but are still making a profit that you still put aside money for tax. One tip we tell our clients is to set up a separate savings bank account to ensure you don’t spend the cash and end up with a surprise tax bill.

This Tax Tips Tuesday is brought to you with love by Nudge Accounting. You can read other Tax Tips here.