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Small business PAYG income tax installments

For those of you in small business, or those of you earning investment income, you may have had experience with the ATO's PAYG income tax installment system and both the benefits and pitfalls of the system.

To those of you who have not yet entered this system lets run through a basic idea of how it works. The system is intended to facilitate the pre-payment of income tax obligations for individuals, companies and superannuation funds. By having such a system and paying as you go on a quarterly basis, it stops such taxpayers from receiving massive tax bills when the time comes to do their income tax returns and forces you to smooth out your cash flow.

Once you have lodged an income tax return showing that you have earned business or investment income in excess of $2,000.00, including partnership and trust distributions, you will receive, in written form, notification from the ATO of your requirements to PAYG instalments. If eligible, you can also choose to pay one annual PAYG instalment before lodging your annual income tax return. The ATO will calculate PAYG instalments for you based solely on your previous years income tax return and the business and investment income shown in that return, after all what else would they be able to use as a basis for their calculation?

Assuming you then pay four quarterly instalments as advised by the ATO, these instalments count as tax paid when preparing your annual tax return for that year. Too much tax paid and you get a refund, not enough and you will need to fork out the balance on your income tax notice of assessment. The one area where people get caught out is when they end up lodging their income tax returns quite late, say between March and June. If you do and your tax return has higher income than the previous year, the ATO will hit you for a catch up payment on the final quarterly PAYG notice, then you will have both your income tax assessment and your June PAYG instalment due within weeks of each other. This is a great reason to start getting your paperwork together and getting your tax return lodged as soon as possible following the end of financial year. Yes, that means now!

Start communicating with your small business accountant and work out a plan to get those tax returns in as soon as you can. It is much better to get it done and know what amounts to plan for, than to procrastinate.