Are you confused by one of these letters from the ATO???
Why did you receive it?
This letter is generally triggered by the lodgement of a tax return with a tax bill of more than $1,000. This tax bill is often due to positively geared investment properties and/or business profits from sole traders, trusts, or partnerships.
Unlike your salary from your employer who withholds tax from your wages, the above income does not automatically have tax withheld from it during the year. This means that you will have to pay all the tax on this extra income when you lodge your tax return. Unfortunately this can often mean that you end up with a very high tax bill. Therefore, the ATO requests that in the future you pay this tax in smaller instalments leading up to the lodgement of your next tax return.
What does it mean for you?
First, the ATO will send you a letter similar to the above letter to notify you that you are being put into the Pay As You Go Instalment (PAYGI) system. The notional tax is your estimated tax bill for the next year. It will be estimated slightly higher than the tax bill from the tax return just lodged. This figure will then be broken into four quarterly payments for which the ATO will send you PAYGI notices with further details about payment.
These quarterly PAYGI notices will be posted to you every three months on a pink form with details of how much to pay and where to pay it to. Alternatively, the PAYGI will be incorporated onto your BAS if you are a sole trader registered for GST.
Please note that you will still need to pay the tax from the tax return that was just lodged. The PAYGI payments are designated toward your next tax return and will not be counted as payment for any existing tax debts.
What happens with the PAYGI when I lodge my next tax return?
If you have paid your PAYGI before lodging your next tax return, the PAYGI will reduce the tax payable on your tax return just like any tax withheld from wages or franking credits on dividends would reduce your tax bill. You may even receive a tax refund if your taxable income is less than what the ATO estimated that it would be.
Why is my first PAYGI more than ¼ of the notional tax?
Your first PAYGI may be more than ¼ of the notional tax if your tax return was lodged after September as this would mean that you’d missed the first quarter of the financial year. Your first PAYGI may therefore include multiple quarters of PAYGI while the following PAYGI will be ¼ of the notional tax. Your first PAYGI may even include the entire year worth of notional tax depending on how late your tax return is lodged.
How does PAYGI work on an on-going basis?
The ATO will continue to send the same quarterly PAYGI notices to you, even into the next financial year, until a new tax return is lodged. This will then trigger a recalculation of your notional tax which will result in a new letter being posted to you and then new amounts being requested on your quarterly PAYGI. This new calculation will also take into account any PAYGI notices that may have been issued during the new financial year while still using the old notional tax calculation.
What if I know that I won’t be receiving as much income from properties or businesses next year?
There will be an option on your PAYGI notice to vary your PAYGI payment down if you know that you won’t need to pay as much tax next year. This variation can only be done before the due date on the pink PAYGI notice. However, you must be sure that you won’t need to pay as much PAYGI as the ATO is asking for. If you vary your PAYGI down and then you still end up with a high tax bill on your next tax return then there may be penalties from the ATO. These penalties may arise if the difference between the tax that you estimated that you would need to pay on the extra income and the actual tax payable on the extra income is more than 15%. It is recommended that you speak to an accountant or the ATO before varying your PAYGI.