Accounting methods
Instalment amount
An instalment amount is the set payment you make towards a tax liability during the year, such as GST or PAYG instalments, instead of paying everything in one lump sum.
An instalment amount is the sum a business pays at regular intervals toward an expected tax liability, instead of paying the whole amount at year end. The term is used for both PAYG instalments, which prepay income tax, and GST instalments, which let some small businesses pay GST in quarterly instalments. The instalment amount is shown on your activity statement for the period.
For PAYG instalments, the amount can be worked out in two ways. Under the instalment rate method, you multiply your instalment income for the period by a rate that the ATO calculates based on your most recent tax return. Under the other method, the ATO gives you a fixed amount, based on your last assessment, to pay each quarter. Which method applies depends on your circumstances and choices.
For GST instalments, the ATO works out an amount, usually based on the GST in your previous year, and you pay that amount each quarter. At year end, you reconcile it by reporting your actual GST in an annual return, and you either pay any shortfall or claim a refund of any excess. This is aimed at small businesses wanting to simplify their reporting, and eligibility rules apply.
Instalment amounts are not a final tax. They are an estimate paid on account. When you lodge your income tax return, the instalments you paid are credited against your final bill. If your business income is rising or falling sharply, the amount might be too high or too low, and you can ask to vary it, taking care because underpaying based on a poor estimate can result in penalties.
A common mistake is ignoring the instalment amount because the business is struggling. Instalments are a payment obligation, and unpaid amounts can incur the general interest charge. If cash flow is tight, contact the ATO about varying the amount or setting up a payment plan, rather than not paying. Also, make sure you use the right amount shown on your latest statement.
Keep records of the instalment amounts you paid, along with the notices, for five years. This is general information only, so confirm your arrangements with the ATO or a registered tax professional.
Worked example
Pia's business is notified of a PAYG instalment amount of $1,500 per quarter based on last year's return. Over the year she pays $6,000 in instalments. When she lodges her income tax return, her tax is assessed at $7,200. The $6,000 is credited, so she owes $1,200 at assessment. Had her income fallen, she could have asked to vary the instalments earlier.
Practical tips
- Check the instalment amount on each statement and pay the correct figure, not last quarter's.
- If your income drops or rises sharply, ask the ATO about varying the amount instead of paying a figure that no longer fits.
- Contact the ATO early if you cannot pay an instalment, rather than ignoring it.