Voluntary Registration for PAYGI - video transcript
Going into business for myself has definitely given me a lot more control over my work life, but it's also opened my eyes to all the things my old boss used to take care of for me.
Stuff like tax and Super used to come out of my pay and I never really had to think about it. But now I'm my own boss, it's up to me to make sure I've got these things covered.
I didn't want to end up with a huge tax bill at the end of my first year in business so I got myself organised and rang the ATO and told them I wanted to be voluntarily entered for PAYG instalments.
Now there's a bit of ringing around and admin things to do at the start but I'm really glad I did it.
I was talking to a mate the other day who didn't do any of this stuff and now he has a $15,000 tax bill!
So, what's different about income tax when you go into business for yourself?
When you were an employee your employer deducted tax from your pay each pay period, and sent it to the ATO on your behalf. This is what's called Pay As You Go Withholding or PAYGW and is a way to pre-pay your tax for the end of the year.
At the end of the year when you complete your tax return and work out how much tax you have to pay these payments are credited against your liability and you end up with either a small bill or hopefully a larger refund.
However when you're self-employed you don't have an employer to send these amounts to the ATO on your behalf. That's where Pay As You Go Instalments or PAYGI comes in.
When you're self-employed and lodge your first income tax return, the ATO will determine whether you are eligible to be automatically entered in the PAYGI system.
Once entered, the ATO will estimate how much you should be pre-paying, based on your last lodged income tax return and The ATO sends this to you on an Instalment Activity Statement, or if you're registered for GST, your BAS.
In most cases this will be quarterly. However it may be annually depending on your estimated income for the year.
So, just like when your boss used to take money out of your pay to stop you getting a big tax bill at the end of the year, PAYGI allows you to do the same thing.
BUT there's a problem with waiting for the ATO to determine your eligibility for PAYGI.
You have to wait until you lodge your first tax return at the end of your first year of being self-employed before you are told how much tax you need to pay. This could be up to 18 months after you've started working for yourself.
And if you haven't put money aside during that time you could end up with a huge tax bill when you receive your first Notice of Assessment.
So to avoid this there are a couple of things you can do:
- Put money away somewhere, for example a bank account to cover what you think you will have to pay, or
- Ask the ATO to voluntarily enter you into the PAYG instalment system.
The thing with putting money aside, like in a bank account, is that it is easily to get to and tempting to spend on other things. However if you are part of the PAYGI system and pay the money to the ATO it's out of mind, out of sight.
So how do you choose to enter PAYGI and make payments?
It's easy to do, just call the ATO to organise it. When you call make sure you have your TFN and other documents or information for proof of identity.
The ATO will ask you a few questions then send you a letter and an activity statement for you to complete. One of the questions you will be asked is whether you want to be voluntarily entered for just the current financial year or until you are manually withdrawn.
When you receive your first activity statement it will show you have nil amount or nil rate to pay.
This is because the ATO doesn't have any information on your business so can't estimate an amount.
You will need to estimate how much you should be paying and do a variation on your activity statement by filling out labels T8, T9 and T4.
This amount will then be shown on your next activity statement which you can use if you are still happy with your estimate, or vary again if you need to.
It really was easy to register, but you're probably wondering how to work out how much tax to put aside if you've only just started your business?
After a month or so in business, you should be able to get a good idea from your records about how much money you'll earn by the end of the quarter or maybe even the year.
As a rough guide, to work out how much tax you may have to pay, firstly calculate your likely annual turnover. You can do this using the figures you already have from your business plan.
Next subtract any allowable deductions, and that will give you your taxable income for the period.
Finally, go to the ATO website and see how much tax you have to pay on the taxable income you have calculated. This will give you an idea of how much tax you should pay via your PAYG instalment.
When you receive your activity statement, put these amounts at the appropriate labels.
If you worked out how much tax you might need to pay over a year, don't forget to divide by 4 if you're paying your PAYG instalment quarterly.
If you have any questions about how to complete the activity statement you can find information on ato.gov.au, or you can ring the ATO and a customer service officer will help you.
So take the steps to stay out of debt, it will make it a lot easier for you in the long run.