Additional method for monthly PAYG instalments
If you pay your PAYG Instalments on a monthly basis, there is an additional simplified method for calculating your instalments that you may be entitled to use. This method is designed to reduce the cost of calculating instalments on a monthly basis.
How to apply the additional method
If you choose to use the additional method you will not need to calculate your actual instalment income every month. For the first two months of each instalment quarter you can make a reasonable estimate of your instalment income and apply your instalment rate. In the third month of each quarter you calculate the total instalment income for the quarter and subtract the estimates used in the first two months. The payment in the third month will be the balance remaining for the quarter, multiplied by your instalment rate.
Eligibility to apply the additional method
Anyone who is paying their PAYG instalments on a monthly basis can use this method, provided they have not been told by the Commissioner that they must calculate their actual instalment income each month.
There are some rules about how you can start to apply this method which are explained below.
New monthly instalment payers
If you are a new monthly payer you can choose to use the additional method in either of the following months:
- the first month of the first instalment quarter in which you become a monthly payer
- the first month of the second instalment quarter after you become a monthly payer.
This allows you to transition to the new measure and provides some flexibility, particularly if you begin paying monthly instalments part way through an instalment quarter.
Existing monthly payers
If you are already paying your instalments monthly, you will be able to make the choice to use the additional method at the start of each income year. The method must be applied from the first month of your income year.
If you choose to use the method in the first month of your income year, you must use the method for the remainder of the income year.
Electing to use the additional method
You do not need to formally notify the Commissioner. You should keep a record of your decision and how you applied the additional method to obtain your estimates from a particular reporting period.
What constitutes a reasonable estimate
The Commissioner has not stipulated how you should calculate the estimate of your instalment income for a particular month.
However, if you use one third of the previous quarter's actual instalment income as your estimated instalment income for the first and second months of the next quarter, the Commissioner will accept this as reasonable, provided you use it consistently within an income year.
Company ABC has been advised of the requirement to make PAYG instalments on a monthly basis. The first month in which they will be a monthly payer will be January 2014.
The company has decided to use the additional method of working out their monthly instalment and has documented that decision.
Its December 2013 quarter instalment income was $300,000,000 and its instalment rate is14.00%.
As the January instalment will be the first instalment of the quarter, the company’s instalment income will be $100,000,000 – which is one third of $300,000,000. The PAYG instalment liability will be $100,000,000 times the instalment rate of 14.00% – which is $14,000,000
February’s instalment income will be $100,000,000 being one third of the instalment income from the December quarter. As the instalment rate has not changed the instalment liability will also be $14,000,000.
March’s liability will be the actual instalment income for the quarter – which is $270,000,000 less the amounts accounted for in the previous two months ($200,000,000) giving $70,000,000 x 14.00%.
The Commissioner recognises this approach may be detrimental for certain entities that receive large, infrequent but cyclical amounts of instalment income, such as life insurance companies that receive large distributions from resident unit trusts. The Commissioner accepts that these entities can modify the above approach to account for these distributions.
End of example
Special rule if the instalment for the third month is negative
If the instalment for the third month of a quarter is negative when using the additional method, you cannot apply for a refund. Instead you will need to revise your instalment income from the previous month(s), starting with the most recent month first. You can do this by lodging a revised activity statement for the applicable month(s).
In Example 1, assume company ABC’s actual instalment income for the quarter is $170,000,000. Using the amounts accounted for in the previous two months ($200,000,000) the company has over stated its instalment income by $30,000,000 for the quarter. Therefore company ABC’s instalment income for March will be zero and the company can revise its February activity statement – which originally reflected an instalment income of $100,000,000 – down to $70,000,000 to balance the overstatement.
End of example
Leaving a consolidated group
You can use the additional method if, after you leave a consolidated group, you become a monthly payer from the beginning of the first month in a quarter. However, if you become a monthly payer from the beginning of the second month in a quarter you must calculate your actual instalment income for the remainder of the quarter. In this case, you can start to use the additional method to calculate your instalment income from the beginning of the next quarter.
Company XYZ is a consolidated group and a monthly payer. Company EFG, ceases to be a subsidiary member of the Company XYZ consolidated group at the end of January 2015 and assumes a monthly payer status from the beginning of February 2015. Company EFG is a 30 June balancing entity.
It must calculate its actual instalment income to determine its instalments for the months of February and March 2015. From April 2015, company EFG can choose to apply the additional method to determine its instalments for each month in the remaining quarters of its income year. It does not need to wait until the commencement of their new income year in July to apply the additional method.
End of example
Varying your instalment rate
The additional method does not change the rules regarding variations. If you choose to use the additional method you can still vary your instalment rate in any month.
If you fail to comply with the rules for applying the additional method, the Commissioner can require you to calculate your actual instalment income. Examples of incorrect application include failing to make a reasonable estimate or choosing to use the method when you are not eligible.
If you are using the additional method and are consistently reporting lower instalment income in the first two months of the instalment quarter you may become the subject of a review. In these circumstances the Commissioner may request information from you that will assist in determining if you have not complied with the rules of applying the additional method.
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This document outlines the additional method of reporting PAYG instalments.