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PAYG Instalments
The Pay as You Go (PAYG) instalment system is a program of pre-paying tax instalments towards your expected tax liability on your business and investment income. It is the ATO’s way of making you prepay your income tax. When you lodge your Income Tax Return for your small business, any PAYG Instalments paid during the year will be credited against the Income Tax calculated. So by prepaying your tax it will help to reduce or avoid those uneven tax payment

at the end of the year. 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. This is where it pays to do some tax planning so these things don’t come as too big a surprise.

Who needs to pay PAYG instalments?
Generally, for individuals and trusts you will need to pay instalments if you reported $4,000 or more ($1 or more if you're not a resident) of gross business income and/or investment income in your latest tax return, unless one of the following applies:

  • The tax payable on your latest notice of assessment is less than $1,000;
  • Your notional tax is less than $500;
  • You are entitled to the seniors and pensioners tax offset.

If you're a company or super fund, you'll generally need to pay instalments if: 

  • The instalment rate ATO calculates is more than zero and you're registered for GST;
  • The instalment rate ATO calculates is more than zero and your notional tax is $500 or more; 
  • Business and/or investment income (excluding capital gains) in your most recent income tax assessment is $2 million or more.

Notional tax is the tax (excluding capital gains tax) that would have been payable on your business/investment income based on current tax rates.

You have a 2013 tax bill of $11,000 on your personal share portfolio. The ATO sends you four PAYG instalment notices during the 2014 financial year for $2,900 each. Therefore, for the 2014 tax year you have pre-paid $11,600 in tax. Your 2014 tax return calculates total tax of $15,000. The amount of tax you owe is reduced by the $11,600 in PAYG Instalments you have paid. Therefore, your tax bill when you lodge your 2014 tax return is $3,400.

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