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How to calculate pay as you go (PAYG) instalment amount and rate
The Australian Taxation Office uses information from the most recent tax return to work out the PAYG instalment amount, which is adjusted to reflect any likely growth in the taxpayer’s income and changes in Australia’s gross domestic product (GDP). The GDP adjustment factor is updated at the start of each income year using data from the Australian Bureau of Statistics and is based on changes over the previous two calendar years.
The reason for such adjustment is because if the instalment amount was solely based on the previous tax situation, it might not cover the actual tax liability, which means that one may have to pay extra tax when lodging a tax return.
The GDP adjustment factor is 0% for 2020/21 and 0% for 2021/22. The 0% rate applies for instalment quarters that commence on or after 1 July 2020.
The GDP adjustment factor:
The ATO calculates a taxpayer’s instalment rate (to two decimal places) using the following formula:
If the calculated rate is more than the highest income tax rate for the entity type, it will automatically reduce it to a more reasonable rate (below).
The instalment rate may be high before adjustment if:
Reasonable instalment rates by entity type
| Entity type | Reasonable rate |
|---|---|
| Individuals (including sole traders) | 55% |
| Trusts | 55% |
| Superannuation funds and SMSF | 45% |
| Corporate tax enities | 30% |
If the taxpayer is an individual (including a sole trader), they will automatically enter the PAYG instalments system if they have all of the following:
latest tax return of $4,000 or more
A company will automatically enter the PAYG instalments system if any of the following apply:
PAYG notional tax
A taxpayer’s “notional tax” for the base year (the latest income year for which an assessment has been made) is calculated as follows:
adjusted tax on adjusted taxable income – adjusted tax on adjusted withholding income
Where a taxpayer’s adjusted tax on adjusted withholding income is greater than the adjusted tax on adjusted taxable income for the base year, the notional tax is nil.
Adjusted taxable income
A taxpayer’s “adjusted taxable income” for the base year is the taxpayer’s total assessable income for the base year, reduced by:
~ any tax loss to the extent that it can be carried forward to the next income year, and
~ the deduction for tax losses claimed in the base year, and
Adjusted withholding income
A taxpayer’s “adjusted withholding income” for the base year is the amount of assessable income from which PAYG withholding has been, or should have been, made for the base year (except for amounts that have been subject to PAYG withholding because the taxpayer did not quote a TFN or an ABN), reduced by the deductions allowed for the base year to the extent that they reasonably relate to those amounts.
There is no legislative guidance as to what deductions reasonably relate to the amounts from which PAYG withholding has been, or should have been, made. There is also no mention of how such deductions are to be allocated where they do not fully relate to PAYG withholding income.
Adjusted tax
Calculation of the adjusted tax on either the adjusted taxable income or the adjusted withholding income is a four-step process.
Step 1: Calculate the income tax payable on the adjusted taxable income or the adjusted withholding income (as relevant). The following tax offsets are disregarded:
Step 2: Calculate the Medicare levy payable on the adjusted taxable income or the adjusted withholding income (as the case may be), disregarding the Medicare levy surcharge.
Step 3: Calculate the amount of any tertiary education assessment debt that would have been repayable for the base year on the assumption that the taxpayer’s taxable income was equal to the adjusted taxable income or the adjusted withholding income (as the case may be).
Step 4: Add up the amounts determined for steps 1, 2 and 3.
Example 1: Corporate taxpayer
ABC Ltd derived the following assessable income and deductions during the base year:
| Item | Amount |
|---|---|
| Gross sales | $120,000 |
| Interest | $10,000 |
| Royalties | $25,000 |
| Item | Amount |
|---|---|
| Cost of sales | $50,000 |
| Tax agent's fees | $2,000 |
ABC Ltd did not quote its TFN in relation to the interest income and, consequently, tax was withheld. On the assumption that ABC is a base rate entity and the tax rate of 25% applies for the year for which the instalment rate is calculated, ABC Ltd’s instalment rate is calculated as follows:
| ABC Ltd's adjusted taxable income | = | assessable income of base year | - | Net capital gains of base year | - | allowable deductions (except tax losses) of base year | - | Tax losses carried forward from base year |
|---|---|---|---|---|---|---|---|---|
| = | $155,000 - $0 - $52,000 - $0 | |||||||
| = | $103,000 | |||||||
ABC Ltd’s adjusted withholding income = nil, since amounts subject to PAYG withholding due to the non-quotation of either the taxpayer’s TFN or ABN do not count.
Adjusted tax on adjusted taxable income
Step 1: = Income tax payable on $103,000
= 25% x $103,000
= $25,750
Step 2: Not applicable
Step 3: Not applicable
Step 4: Add Steps 1 to 3
= $25,750 + $0 + $0 – $0
= $25,750
ABC Ltd’s notional tax is therefore $25,750.
ABC Ltd’s base assessment instalment income equals so much of its assessable income for the base year that is instalment income.
This would be $155,000 ($120,000 + $10,000 + $25,000).
| ABC Ltd's instalment rate | = | \(ABC Ltd's notional tax x 100\over ABC Ltd's base assessment instalment income\) | ||
|---|---|---|---|---|
| = | \($25,750 x 100\over $155,000\) | |||
| = | 16.61% (rounded to two decimal places) | |||
Example 2: Individual taxpayer
Mary derived the following assessable income and incurred the following deductions during the year ended 30 June 2021 (the base year):
| Item | Amount |
|---|---|
| Salary | $30,000 |
| Net capital gain | $12,000 |
| Interest | $8,000 |
| Dividends (fully franked) | $2,000 |
| Dividend gross-up amount ($2,000 x 30/70) | $857 |
| Item | Amount |
|---|---|
| Work-related expenses | $800 |
| Interest and dividend deductions | $200 |
Mary did not quote her TFN in relation to the interest income and, consequently, $3,720 tax was withheld. Further, on her assessment for the year ended 30 June 2021, Mary does not have a tertiary education assessment debt. Using the personal tax rates for the year ending 30 June 2022, Mary’s instalment rate is calculated as follows:
| Mary's adjusted taxable income | = | assessable income of base year | - | Net capital gains of base year | - | allowable deductions (except tax losses) of base year | - | Tax losses carried forward from base year |
|---|---|---|---|---|---|---|---|---|
| = | $52,0857 - $12,000 - $1,000 - $0 | |||||||
| = | $39,857 | |||||||
Mary’s adjusted withholding income = $30,000 – $800 = $29,200.
Adjusted tax on adjusted taxable income
Step 1: = Income tax payable on $39,857
= Tax on $39.857 using 2021/22 rates – franking credit of $857
= $4,1114.83 – 857 = $3,257.83
Step 2: Medicare levy on $39,857
= $39,857 x 2% = $797.14
Step 3: Not applicable
Step 4: Add Steps 1 to 3
= $3,257.83 + $797.14 + $0 – $0
= $4,054.97
Adjusted tax on adjusted withholding income
Step 1: = Income tax payable on $29,200
= Tax on $29.200 using 2021/22 rates
= $2,090
Step 2: Medicare levy on $29,200
= $29,200 x 2% = $584
Step 3: Not applicable
Step 4: Add Steps 1 to 3
= $2,090 + $584 + $0 – $0
= $2,674
Mary‘s notional tax is therefore $1,380.97 ($4,054.97 – $2,674.00)
Mary’s base assessment instalment income equals so much of its assessable income for the base year that is instalment income.
This would be $10,000 ($8,000 + $2,000). The dividend gross-up amount is not instalment income as it is statutory income.