Which PAYG instalment method to use

Which PAYG instalment method to use is a question that comes up at the start of every financial year – or rather with the September activity statement.

PAYG Instalments are income tax payments paid during the year by companies, super funds and individuals.  In respect of individuals, it is levied on income not taxed upon receipt with common examples being interest, dividends and trust distributions.  It is not assessed on wages or capital gains.

One can pay PAYG instalments under one of two methods – by paying a fixed dollar amount as advised by the ATO or applying a percentage advised by the ATO against the income of that quarter. So what are the relative advantages and disadvantages of each method?

Under the fixed dollar method:-

  • You know what you are up for.
  • If the current year (in this case 2016/17) is much better than 2015/16, then any shortfall will not be payable until the Tax Return for 2017 is lodged – this could be as late as May 2018.
  • It’s a simple method as it doesn’t require any calculations.
  • If the amount is too high then it can be very downwards – but I would not do so on the September activity statement when the year is far from known.
  • Should it be that the PAYG Instalments already paid are too high then a variation can be made and any overpayment refunded.
  • This is a better method to use if you wish to avoid complex and costly calculations of your gross income years (which is required under the percentage method).
  • As it is a simple method, no extension to lodge is granted where there is only a PAYG instalment payable; the extensions to lodge through the Taxpayer or Tax Agent Portal are not available.

Under the percentage method:-

  • The ATO determines the percentage by dividing the prior year’s tax bill into the prior year’s tax liability. It is a rough method but one which usually approximates the appropriate tax.
  • One will pay more if the income in 2016/17 is greater than 2015/16. People who prefer to pay the appropriate (or should I say approximate) amount of tax each quarter as they go prefer this method.
  • It is a good method to use if one’s income is likely to be less than the year before as one will pay less tax. Under the fixed dollar method, one would be forced to vary the amount which could be problematical (see below).
  • As the percentage method requires a calculation of gross income, an extension to lodge is available to those who lodged through the Taxpayer or Tax Agent Portal

Two other important points to note are:-

  1. You are entitled to vary an amount or instalment downwards – but do so carefully as the ATO has the right to issue a fine for gross underestimations.
  2. It may be that your September activity statement offers only the fixed dollar or percentage method. If you do wish to change method, a request to the ATO can be made to reissue the activity statement with both methods being offered.

We would welcome the opportunity discuss which is the best method for you.

At MRS, we will spend today planning for your success tomorrow.

 

At MRS, we will spend today planning for your success.