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Additional method of calculating monthly PAYG instalments

Monthly PAYG instalment payers can use a shortcut method to calculate their instalments.

Last updated 8 March 2022

The additional method is a shortcut for calculating monthly pay as you go (PAYG) instalments.

It is available only to monthly PAYG instalment payers. We will notify you if you need to pay instalments monthly.

Should you use the additional method?

Monthly PAYG instalments are calculated by multiplying instalment rate × instalment income. Normally this requires you to work out your instalment income each month.

The additional method is designed to save you time because you:

  1. estimate your instalment income for the first 2 months of each quarter
  2. work out your instalment income for the quarter in the 3rd month, and pay the balance owing.

The additional method may not be suitable for entities that receive large, infrequent but cyclical amounts of instalment income. For example, it may not suit life insurance companies that receive large distributions from resident unit trusts. These entities can modify the approach to account for these unusual distributions of their income.

When you can start using the additional method

The point at which you can start to use the additional method depends on whether you are:

  • a new monthly instalment payer
  • an existing monthly instalment payer
  • leaving a consolidated group.

New monthly instalment payers

As a new monthly payer, you can start using the additional method in either:

  • the first month of the first instalment quarter in which you start paying monthly
  • the first month of the second instalment quarter after you start paying monthly.

This allows you time to change to the new method if you begin paying monthly instalments part way through a quarter.

Existing monthly payers

If you already pay your instalments monthly, you can start using the additional method from the first month of your income year.

You must then continue to use this method for the rest of the income year.

Leaving a consolidated group

After you leave a consolidated group, the point at which you can start using the additional method depends on when you become a monthly payer.

  • If you become a monthly payer from the beginning of the first month in a quarter, you can use the additional method immediately.
  • 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 2 months remaining in the quarter. You can then use the additional method from the beginning of the next quarter.

Example: using the additional method after leaving a consolidated group

Company EFG is a subsidiary member of a consolidated group. The company:

  • ceases to be a subsidiary member of the consolidated group at the end of January 2021
  • becomes a monthly payer from the beginning of February 2021
  • has a 30 June balancing date.

For February and March 2021, Company EFG must calculate its actual instalment income to determine its PAYG instalments.

From April 2021, company EFG can use the additional method to determine its instalments. It does not need to wait until the start of the new income year.

End of example

How to use the additional method

Record your use of the additional method

If you use the additional method, you don't need to formally notify us – just keep a record of:

  • your decision
  • how you applied the additional method to obtain your estimated instalments.

Calculate your instalments using the additional method

You do not need to calculate your actual instalment income every month. Instead:

  1. For the first 2 months of each instalment quarter 
    • make a reasonable estimate of your instalment income
    • multiply this by your instalment rate to work out your monthly instalment.
  2. In the 3rd month of each instalment quarter  
    • work out your total instalment income for the quarter
    • subtract the instalment income amounts you estimated in the first 2 months
    • multiply the balance by your instalment rate to calculate your monthly instalment.

Reasonable estimate

We don't specify how you should estimate your monthly instalment income. However, if you use one-third of the actual instalment income for the previous quarter we accept this as a reasonable estimate, provided you use it consistently within an income year.

Example: calculating instalments using the additional method

Company ABC is required to pay monthly PAYG instalments. It became a monthly payer in January 2021.

The company decides to use the additional method to calculate its monthly instalments and has recorded that decision.

Using the steps above, ABC calculates its monthly instalments as follows.

1. Estimate instalment income for first 2 months of quarter

In December 2020, the company's:

  • quarterly instalment income is $300 million
  • instalment rate is 14%.

ABC estimates its monthly instalment income as $100 million (one-third of $300 million). Therefore, its PAYG instalment for January will be $14 million ($100 million × 14%).

For February, ABC's estimated monthly instalment income is again $100 million. Its instalment rate has not changed, so the monthly PAYG instalment will again be $14 million.

2. Calculate instalment income for quarter and balancing payment

At the end of the quarter, ABC works out its actual instalment income for the quarter was $270 million. To calculate its March 2021 instalment, the company:

  • takes its actual instalment income for the quarter ($270 million)
  • subtracts the estimated instalment income used in the previous 2 months ($200 million)
  • multiplies the balance ($70 million) by the instalment rate of 14%
  • pays this amount ($9.8 million) as its PAYG instalment for the third month.
End of example

If the instalment for the 3rd month is negative

You cannot apply for a refund if the instalment you work out for the third month of a quarter is negative. Instead, you need to revise your instalment income for the previous month or months, starting with the most recent month.

You can do this by lodging a revised activity statement for the applicable month or months.

Start of example

Example: calculating instalments when the third month is negative

Take the same facts set out in the previous example, except that company ABC’s actual instalment income for the January to March 2021 quarter was $170 million.

In both January and February the company estimated $100 million in instalment income ($200 million in total). This means ABC overstated its instalment income by $30 million.

The company should:

  • report its instalment income for March 2021 as zero
  • lodge a revised activity statement for February 2021, in which it records its instalment income for the month as $70 million (down from $100 million).
End of example

Varying your instalment rate under the additional method

If you choose to use the additional method you can still vary your instalment rate in any month.

What happens if you use the method incorrectly

We can require you to calculate your actual instalment income if you:

  • fail to make a reasonable estimate
  • use the additional method for periods in which you are not eligible.

If you use the additional method and consistently report lower instalment income in the first 2 months of the instalment quarter compared with the third month, we may review your estimates and request information to check you have applied the method correctly.

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