PAYG
Instalment rate
The instalment rate is the percentage the ATO gives you to multiply by your instalment income each period to work out your PAYG instalment.
The instalment rate is a percentage worked out by the ATO to calculate your PAYG instalments. When you use the instalment rate method, you take your instalment income for the period, which is generally your business sales or other relevant income, and multiply it by this rate. The result is the amount you pay for that period, so the instalment moves up and down with your actual income.
The ATO calculates the rate from your most recent tax return. It looks at the tax assessed on your business and investment income and compares it to that income, producing a rate that is expected to collect roughly the right amount of tax across the year. When you lodge a new return, the rate is updated, so it can change from year to year.
This method is popular with businesses whose income fluctuates, because the instalment shrinks in quiet periods and grows in busy ones, which matches cash flow. By contrast, a fixed instalment amount stays the same whatever the business earns. However, the rate method requires you to calculate your instalment income each period, and this requires accurate records and attention to what counts as income.
You can usually choose between methods, subject to ATO rules, and you may be able to vary the rate if you reasonably expect your tax to be different from what the ATO's rate implies. Doing so needs care. If you vary to a rate that is too low and your final tax ends up much higher, you could be hit with interest and penalties. Keep a record of your reasoning and the figures that support it.
A common mistake is applying the rate to the wrong base, for example by including GST in instalment income, or including amounts that are not business income. Instalment income generally excludes GST, so use your GST-exclusive sales. Another mistake is using last year's rate after it has been updated. Always check the current rate on your statement or in your ATO account.
Keep your records of the calculation for five years. This is general information only, so confirm your instalment rate and method with the ATO or a registered tax professional.
Worked example
The ATO advises Lena a PAYG instalment rate of 4.5%. In a quarter, her GST-inclusive sales are $60,500, so her GST-exclusive instalment income is $55,000 (60,500 divided by 1.1). Her instalment is $55,000 multiplied by 4.5%, which is $2,475. In a slow quarter with $22,000 of instalment income, she would pay only $990.
Practical tips
- Apply the rate to GST-exclusive income, not your GST-inclusive sales.
- Check the current rate each time, as it can change after you lodge a new tax return.
- If you vary the rate, keep notes showing why your expected tax differs from the ATO's calculation.