If you have noticed a large $$ jump in your latest BAS liability, but not an increase in sales or wages, it may be because your business must now pay PAYGI. This is the acronym for Pay As You Go Instalment tax.
PAYGI is different to the PAYG tax on an employee’s pay slip. Yet it is a similar theory. That is, you are paying tax in advance before it is due.
PAYG on pay slips relates to the income tax an employee will pay personally at the end of the year. You are simply taking the tax out of their pay and sending it to the ATO on their behalf.
The same principle applies for your PAYGI business tax. You are paying it in instalments in advance during the year.
However, you are paying it quarterly in advance. It will be applied against your business’ tax bill at the end of the financial year. Therefore, you will have less to pay at the end of the year.
When a business first launches, PAYGI is not usually required. However, it is common to apply from the 2nd year of trading and can feel like a rude surprise because most owners don’t expect it. So do consider it in your cash flow.
Your BAS Agent bookkeeper will journal the amount to the Balance Sheet as a negative liability so you can see how much tax you have paid in advance. It should be reconciled each quarter.
A wisely calculated PAYGI will preserve your business cash flow during the year, yet still knock over the tax debt at the end of the year.
It all seems a bit cheeky to have to pay tax before you have earned the income, but at least the bill will be less painful when the financial year tax return is calculated and due.
If you enjoy reading about tax, get more info from the ATO HERE.
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