Pay as you go (PAYG) instalments are regular prepayments of tax on your business and investment income.
PAYG instalments are calculated using either the instalment amount or instalment rate method. If you’re eligible to choose between these options, they’ll both be shown on your business activity statement (BAS) or instalment notice.
Case study 1: Kelly the DJ
Kelly is a DJ, working at festivals from November to January. She chooses to use the instalment rate method as it suits her seasonal business income.
Using the rate method means she needs to work out her business income each period. It helps her manage cash flow because the amounts she pays will vary in line with her income.
When Kelly receives her BAS or instalment notice, she calculates the instalment based on her income for that period, multiplied by the rate provided.
Case study 2: David the plumber
David is a plumber with regular monthly business income, so he chooses the instalment amount method. He won’t need to work out his business income each period to use this method.
David pays the instalment shown on his BAS. The amount is calculated from information in his last lodged tax return.
You can change instalment methods on your first activity statement of the next financial year. The method you choose will apply for remaining instalments for the financial year.
If Kelly or David think the instalments they need to pay will add up to be more or less than their tax liability for the year, they can vary their instalments.
The ATO encourage you to review your tax position regularly, so your PAYG instalments reflect your expected tax for the year and to avoid penalties.
If you’ve noticed your instalment rate has increased, see How the ATO calculates your PAYG instalment amount or rate.
Source: ATO Newsroom