Pay As You Go, simply called PAYG, is a cloud computing billing method that allows business owners to pay regular instalments towards their income tax liabilities. They don’t need to worry about paying a large amount as income tax at the time of filing their income tax returns when they are contributing towards their PAYG instalments. By planning your income tax liabilities, you can maintain a healthy cash flow in your business and also get rid of worries about tax obligations.
Pay As You Go is known as Pay As You Earn in many western countries such as the U.K, Ireland, New Zealand, and South Africa. If the earnings of the individual exceed a basic National Insurance Lower Income Level, they are required by the law to pay income tax to the government. Pay as You Earn comes as a relief for students who are not earning enough and face hardships during repayment of their loan instalments. In their case, a repayment plan is prepared based upon their earnings.
How PAYG instalments are decided?
Authorities look at the most recent income tax return of the business owner to see the income reported from the business. On the basis of this income and the current tax rates, the tax liability of the business owner is calculated. They are asked to pay this amount in equal instalments and the money collected is offset at the time of paying the annual income tax returns.
PAYG Withholding
This is another type of PAYG where an employer makes pre-payments towards the income tax obligations of his employees. The tax liabilities of the employees are divided into equal instalments so that they do not have to worry about paying a huge sum at the time of filing an annual income tax return.
The only difference between PAYG instalments and PAYG Withholding is that the pre-payment is done on behalf of self in instalments and on behalf of the employees in withholding. Both these types of PAYG are meant for income tax provisioning.
To be eligible for PAYG Withholding, an employer needs to register with the ATO. It can be done at the time of applying for the ABN or later when setting up MYGovID account. They can start withholding money on behalf of their employees and make payments to ATO.
In the case of PAYG Instalments, the business owner gets a reminder for the amount and the instalment to be paid to ATO. He can choose to calculate his instalment amount based on his earnings. It becomes handy in the case of a business where there are drastic changes in the cash flow.
Conclusion
If you have just started your business and expect profits, it is a prudent idea to enter the PAYG Instalment system voluntarily. You will find that making regular payments to the ATO gets rid of the worry about arranging a lumpsome amount at the time of filing your annual income tax. It also helps in maintaining a smooth cash flow for your business.
