A guide to income tax for business owners

We’ve built this article around the questions we frequently get from new business owners. Scroll down, or feel free to jump straight to the one on your mind!

What are PAYG Instalments?
PAYGI Methods
How is PAYGI Calculated?
Major Pitfall of First Year PAYGI Taxpayers
What happens when you lodge your tax return?
When is Income Tax Due?

What are PAYG Instalments?

The moment it’s anticipated that you’ll pay more than $500 in tax per year, you enter the ATO’s Pay As You Go Instalment (PAYGI) regime.

PAYGI is a method in which you pay your current year’s tax as you go.

It’s designed to help businesses ease cash flow by prepaying smaller amounts throughout the year instead of a giant lump-sum.

Why do I need to prepay my tax?

Back when you were a “normal” employee, your employer took responsibility for sending your tax to the ATO. It’s what we call Pay As You Go Withholding (PAYGW).

When you’re instead receiving profits from your business as a sole trader or where you are making profits in your company, there are two drawbacks to you simply paying the full amount of tax at the end of the financial year:

  • The ATO doesn’t get paid for a full year
  • Because you need to come up with a lot of tax in May, it sneaks up on you

PAYG Instalments is the government’s answer. You don’t need to pay tax every month, and you don’t need to come up with a lump sum in May. Instead, you pay your tax in four instalments, and any additional tax or refund will be assessed by the ATO upon lodgement of the tax return.

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PAYGI Methods

Instalment amount

The simplest option as you pay the instalment amount that the ATO calculate for you based on your last tax return.

Instalment rate

You work out your instalment amount using an instalment rate provided by the ATO and your instalment income for the quarter.

The instalment rate is a percentage that is calculated by using the proportion of your tax payable to your instalment income from your last lodged tax return.

Your instalment income is all the ordinary income you earned from your business (such as sales, interest, rent, dividends etc).

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How is PAYGI Calculated?

Instalment amount

The ATO estimates PAYG Instalments based on the most recent tax return lodged. Let’s take the 2021 tax year as an example:

Most recent tax return filed 2021 provisional tax amount based on
Year ended 30 June 2020 2020 tax payable + 2021 GDP adjustment 
Year ended 30 June 2019 2019 tax payable + 2020 & 2021 GDP adjustment
Year ended 30 June 2018 2018 tax payable + 2019, 2020 & 2021 GDP adjustment

Once the 2021 PAYGI amount is known, it needs to be paid in equal quarterly instalments (except in the case of first year PAYGI tax payers – see below).

Instalment rate

The ATO works out your instalment rate – not you or your accountant. The easies way to explain the calculation is to provide an example.

Tax bill for year ended 30 June 2021 – $46,000
Total instalment income for the year ended 30 June 2021 – $920,000 

The ratio percentage is 5%  [$46k divided by $920k]. 

Instalment income for the quarter ending 30 September 2021 – $204,000
PAYGI payment is $10,200 

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Major Pitfall of First Year PAYGI Taxpayers

If 2021 is the first year you’re operating (year ended 30 June 2021), you haven’t paid tax for a while. Suddenly you have to pay for 2021 and prepay 2022.

Assuming you have a June year-end and lodge on the concessional due date when lodging through a tax agent, let’s see what your first year in business will look like:

From business start date to June 2021 – no tax paid   

May 2022 – all your tax for the 2021 year in one lump sum       

August 2022 – full 2022 year PAYG Instalment     

At Beany, we can provide you with the expected amounts and the due dates. The trick is to get your financial information into us as quickly as possible so you have plenty of time to plan for tax payments.

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What happens when you lodge your tax return?

When we complete your tax return at the end of the financial year we include the PAYG Instalments as credits. A final refund or tax bill will be calculated after considering the instalments.

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When is Income Tax Due?

PAYG Instalments

PAYG Instalments are payable each quarter as part of your Business Activity Statement (BAS). The PAYG Instalments are included in the following Activity Statements:

  • September
  • December
  • March
  • June

Final Income Tax

For those who lodge through a Registered Tax Agent, the final tax payment is due in May the following year.

If you lodge yourself, income tax is due in November the same year.

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