Sometimes, it seems like you are paying a tax bill all the time!
We know it can be frustrating, but that’s the tax system that we are in! Let’s try to reduce the frustration by at least, getting to understand why there are so many tax “bills” and what it all means. We can’t reduce the frequency for you, but at least let us explain what they all are.
First let’s start by acknowledging that everyone in Australia has to pay tax if they earn above certain limits. And by everyone, we also mean certain non-individual “entities” being companies, corporations, superannuation funds, and sometimes, trusts. All of these entities, and you, are “taxpayers” under the system.
So, unless you cheat on your taxes, you will be paying something. The more you earn, the more you will pay. That’s the system.
However, because of the frequency of when you pay tax bills, it sometimes seems you are paying more than your fair share.
To explain the different payments, we need to split the different tax bills between your BAS payments and your income tax payments.
Let’s first take the BAS payments. If you are registered for GST or PAYGW (Pay As You Go Withholding) you will be completing and paying BAS every quarter after 31 March, 30 June, 30 September, and 31 December. Your BAS Payment will include:-
- GST – this is not your tax, but the GST collected on sales less GST paid on expenses. In effect you are collecting what other countries might call “Sales Tax” on behalf of the government and sending the net to them (or possibly getting a net refund);
- PAYGW – again, this is not your tax, it is the tax that you have withheld from your salaried workers, and you are collecting their tax on behalf of the government;
- PAYGI – and we will deal with this later below;
- Other specialist taxes such as FBT.
So some of your “tax bills” are actually other people’s taxes.
Now let’s look at your income tax.
The basic tax you pay is on your net income of a tax year that ends on 30 June. So, for example, we will prepare your tax return for the year ended 30 June 2016 in say December 2016 (there are Tax Office set deadlines for when your tax return has to be lodged and paid, and we monitor this for you).
Your tax return will show a calculation of the tax you owe (or your refund) for 2016. Any refunds are sent directly to your bank account by the Tax Office within about 2 weeks of lodgement.
Any amounts payable is subject to your “due date” and may range from October of the year (in this case 2016) to May of the next year ie May 2017.
So that’s one of the “tax bills” you have to pay – on the income for the year just completed.
However in Australia, we also have PAYGI or Pay As You Go Instalments. You will pay PAYGI if your annual tax is $4,000 or more.
PAYGI is basically the Tax Office estimate of what tax you will pay for the next year (in the above example the year ending 30 June 2017), but they expect you to pay that estimated tax during July 2016 to June 2017 (before the year ends!) in 4 instalments.
If you pay PAYGI, then at the end of the year, after calculating your tax liability, they will give you credit for the PAYGI instalments you paid during the year.
To make it more complicated, the Tax Office estimates your PAYGI based on the last known tax return. You can see from the above example that if we prepare and lodge your tax return for June 2016 in December 2016, the last tax return that they know about up to then is your 2015 tax return. So, you will find that your PAYGI instalment payment for 30 September 2016 is based on the 2015 tax return, as is the December instalment, then when you get the March instalment, they adjust the quarterly figure based on the now known 2016 tax return, so that your March instalment could be substantially higher or lower.
That’s why we have computers to calculate this!
So another of your “tax bills” is your PAYGI.
And, because you are paying for the year’s tax before the year even ends, and in that period you are also paying last year’s tax, it may seem like you are paying double what you think you should be paying! It’s a timing issue.
So to summarise, you may be making “Australian Taxation Office” payments at multiple times through a given year and it all seems like too much tax, but you are actually paying your BAS, last year’s correct tax, and this year’s estimated tax – all in the same year!
Ultimately, what can you do about this? Unfortunately not too much because we pay tax in accordance with the legislation in place. However, with planning, we can do things like make sure the PAYGI estimates are as accurate as possible, look at increasing deductible expenses, identify approximate tax liabilities and when they are due so that you can organise your cash flow, analyse your prices and debtors/creditors cash flow to make sure that your GST is properly planned.
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