Why is my PAYG Instalment so high?

It is (again) time to pay (or vary) your quarterly PAYG Instalment.  A lot of us have received the “pink form” in early July or have received a notification from MyGov that their quarterly PAYG Instalment is available on MyGov.

Some of us would ask:

What is PAYG Instalment, why do I need to pay it?

How did the ATO work out the amount?

Why this quarter’s instalment is much higher than others?

Can I “dial it down” a bit?

Let’s have a look at the What, Hows and Whys.

What is PAYG Instalment, why do I need to pay it?

PAYG Instalment (PAYGI) are a prepayment of income tax, to help you reduce your income tax bill when you lodge your tax return. It can either be paid quarterly, or annually if the ATO allows.

Individuals (or companies) are required to pay PAYGI where they have received business or investment income and as a result had tax liability when they lodged their tax returns.

Generally, it applies to business owners, investors and sub-contractors.

How did the ATO work out the amount?

The ATO works out the amount you are required to pay based on the following factors:

  • your investment income, or business income, in your last lodged tax return
  • ATO’s GDP increase
  • ATO’s estimate on your increase in income
  • The quarter of the financial year you are in

For example, in August you have lodged your tax return with some investment income. The ATO will notify you: how much your instalment amounts to be, the frequency of payment. Say your instalment amount for the whole year is $1,000 and your frequency of payment is quarterly. Your first payment will be $250 (1/4 of the instalment for full year) in the September quarter.

This means that the later in the financial year you lodge your tax return, the less quarters you have left for the financial year, and the higher your instalment amount would be.

For the example above, if instead the return is lodged in January the following year, the ATO will ask for $500 per quarter for the March and June quarters, so that by June quarter you would have paid the $1,000 instalment that they requested.

Why this quarter’s instalment is much higher than last time?

Your PAYG Instalment amount is reassessed every time you lodge your tax return. So if you have higher investment/business income in your latest tax return lodged, the ATO will readjust the amount of Instalment required and you may find that the ATO asks for a higher amount. This is all done to ensure that you will have already paid your estimated tax liability on your investment/business earnings before your lodge your tax return, to avoid a big “bill shock”.

Can I “dial it down” a bit?

Depending on your investment/business situation, or expectation of income for the rest of the financial year, you may be able to “dial it down” a bit, before the due date of the Instalment.

When working out how much to vary it down, you need to ensure that you do not underestimate the amount so much that you end up having a tax liability when lodging your tax return, otherwise the ATO may apply penalties and general interest charge on the difference.

If you believe you can vary the instalment down, but is at a loss on how to do it, let Aston take your worry away. It is better to do it right the first time, than to risk making a costly mistake!