Question 15 - How do PAYG Tax Instalments Work?

If you earn business income, you will be required to make pay-as-you-go (PAYG) instalment's based on your previous years taxable income.

This is how it works…

You make regular payments (instalments) during the year, usually once every quarter. i.e. Sept, Dec, March and June. Each payment represents 25% of the tax you paid in the previous financial year.

 The ATO will send you a payment notice for each of these quarterly payments. It’s always good to know that if your income for the current financial year is less, you can vary these instalments in any quarter.

 Then, when you lodge your tax return, the PAYG instalments you have paid during the year are offset against your tax, leaving you with little or no tax to pay or you will get a refund of you have overpaid your tax.  Just think of your instalment's  as a deposit on next year’s tax.

It is important to understand how quarterly instalments work so that you can manage your cash flow.

Let’s look at an example…

Bill has a taxable income of $100,000 for the 2023 financial year. The tax payable on this amount of income is $23,766. This amount would be due and payable around March 2024.

Bill would then enter the PAYG system and his approximate instalments for the 2024 financial year would be as follows.

Sept 2023 $5,941 ($23,766 x 25%)
Dec 2023 $5,941 ($23,766 x 25%)
March 2024 $5,491 ($23,766 x 25%)
June 2024 $5,491 ($23,766 x 25%)

If by chance you lodge your tax return for 2023 late, then the ATO will adjust your quarterly instalments so that you have paid 25% of your tax by September, 50% by December, 75% by March and 100% by June.