Companies, trusts, superannuation funds, sole traders and large investors are generally required to use the pay as you go (PAYG) instalment tax system.
This method of tax payments calls for quarterly instalments during the income year that are credited toward your business’s expected tax liability.
Starting 1 January 2014, all large entities in the PAYG instalment system will have to pay monthly. The instalments will be phased in according to a business’s annual turnover.
The ATO sends out letters advising your expected tax bill and the year that was used to calculate the amount.
The ATO letter will stipulate:
1. Your PAYG instalment rate. This is a percentage that approximates the tax payable on your business and investment income. The ATO calculates the rate from information in your latest income tax assessment. The ATO tries to set the rate fairly close to your actual tax liability. The instalments are credited against your tax liability and that determines whether you will owe more or receive a refund.
2. Your tax on business and investment income. The ATO will provide you with instalment amounts based on your latest income tax assessment. If you lodge a new tax return or amend your latest return, these amounts may be different to the amounts printed on your activity statement.
Although the tax office determines the instalment rates, you can choose whether the amount you pay is based on:
- The instalment rate multiplied by your quarterly income; or
- An amount determined by the ATO.
The second option can present a problem. As the amount is based on your historical taxes, it may not reflect your current situation. The advantage is that you don’t have to spend time calculating your income for each instalment. Whichever option you choose, you must stick with it for the entire income year.
There is some flexibility in modifying your obligations. You can vary the instalment amount if you estimate your income and the tax on it and determine that the ATO calculation would require you to pay more than your expected tax for the year. This flexibility can be particularly useful in managing liquidity needs.
3. Your payment schedule. PAYG taxes are generally paid quarterly and, starting in 2014, monthly, phased in according to turnover. The new instalment system is being extended to cover all large entities including trusts, superannuation funds, sole traders and large investors. This new arrangement is expected to be completed for the calendar year starting 1 January 2017.
Some primary producers and special professionals still may be able to pay semi-annually.
If you want to change your instalment amount you must provide the ATO with a reason.
The following table lists the reasons the ATO generally accepts as circumstances that can significantly change your tax liability:
|Investment change||You have changed your investment strategy or policy.|
|Current business structure not continuing||Your current business has stopped trading or you have changed its structure.|
|Change in trading conditions||Unusual transactions or expenses, such as buying major equipment.|
|Business restructuring||You change the structure of your business. For example, you could expand of contract your organisation’s operations and significantly change your tax obligation in the process.|
|Change in legislation or product mix||Changes in the law or the products your business sells that have a major effect on your tax.|
|Domestic or foreign financial market changes||This reason generally applies to businesses whose income is affected by changes in financial products, for example, banks, finance and insurance businesses.|
|Use of income tax losses||You will be using income tax losses, including capital losses transferred from another entity.|
Consult with your Westlawn Financial Adviser or Westlawn Business Services Accountant before modifying instalments. Interest penalties can apply when the sum of quarterly payments for the tax year end up being less than the amount of tax owed by a sufficiently wide margin.
PAYG instalment adjustments
The ATO adjusts the PAYG instalment amounts each year using a formula that takes into account the expected growth in the economy.
This is known as the Gross Domestic Product (GDP) adjustment and is based on data published by the Australian Bureau of Statistics. The GDP adjustment method is available to individuals, multi-rate trustees, eligible small business entities as well as companies and certain super funds with $2 million or less of instalment income for the previous income year.
The GDP adjustment is worked out using information from earlier years. The ATO says this means it may not match current economic conditions.
When economic growth slows, the GDP adjustment may seem relatively high, while in conditions of sudden economic growth, the GDP adjustment may seem relatively low
While you can seek to vary your instalment amount there are penalties if taxpayers vary their PAYG instalment amount down and end up paying less than 85% of the tax they should have paid on their business and investment income.
Westlawn Business Services Pty Ltd provides this information for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers.
Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.