PAYG
Instalment income
Instalment income is the business and investment income you earn in a period that is used to calculate your PAYG instalment, and it generally excludes GST.
Instalment income is the base figure on which a PAYG instalment is calculated under the instalment rate method. It is generally your ordinary income from business and investments for the period, such as sales, fees, interest and similar receipts, measured without GST. Certain amounts are excluded, including GST you collected, some capital receipts and amounts that are not assessable income.
For most small businesses, instalment income is effectively your GST-exclusive sales for the quarter. If your accounting software records sales including GST, you must remove the GST component, which is one-eleventh of the tax-inclusive price. For example, $11,000 of GST-inclusive sales gives $10,000 of instalment income. Forgetting this step would overstate your instalment and mean you pay more than necessary.
The way you account for income can affect instalment income. If your business uses a cash basis for income tax, you include payments in the period received. If you use accruals, you include income when it is earned or invoiced. The ATO's guidance on how to report instalment income depends on your situation, so be consistent with how you prepare your tax return.
On the BAS, instalment income is entered at the relevant instalment label and is multiplied by your instalment rate to produce the amount payable. Some people report instalment income through their activity statement even when GST reporting is simplified or annual, so check what your statement requires. If you are on a fixed amount, you generally do not need to report instalment income each period.
Common mistakes include including non-income receipts like loans or owner contributions, forgetting to exclude GST, or leaving out interest and other investment income. Another is treating GST-free sales differently from taxable sales: both are income, and both count. Reconcile your instalment income to your profit and loss report so you can explain differences.
Keep your working papers for five years in case the ATO asks how the figure was reached. This is general information only, so confirm what counts as instalment income for you with the ATO or a registered tax professional.
Worked example
In a quarter, Omar's business invoices $77,000 including GST on taxable sales and $10,000 of GST-free exports, and he receives a $5,000 bank loan. Instalment income is the sales without GST: $77,000 divided by 1.1 is $70,000, plus $10,000 of exports, giving $80,000. The loan is not income and is excluded. At a 4% instalment rate, his instalment is $3,200.
Practical tips
- Remove GST from your sales before applying your instalment rate.
- Exclude loans, owner contributions and other non-income receipts from instalment income.
- Reconcile instalment income to your profit and loss report each quarter so you can explain any difference.