The Difference Between Income Tax And Instalment Tax

PAYG instalments are prepayments only, and they are cash flow items in your business. They are not the actual result.

When it comes to income tax in small business, a lot of people don’t understand the difference between income tax and instalment tax.

To help you understand, here is an example of an income tax account which I will explain. This assumes that you are running the business through a trading trust and distributing out profit at the end of the year to a company beneficiary.

Company Income Tax Account

Trust Profit $10,000
Tax $2,750
Instalments paid $2,000
Left to pay $750

The Trust Profit received by the corporate beneficiary is $10,000. The tax rate is 27.5%, so that is $2,750 in tax, assessed by the ATO on the profit and loss of that company beneficiary.

During the year, the company has been required to pay company instalments which are just tax paid on a quarterly basis, assessed by the tax office. This amount of $2,000 is a cash flow item during the year. It’s not what is actually happening for the income tax for the year. It’s prepayments on this tax.

The instalments during the year were $2,000 and what’s left to pay on the income tax return is $750. But at the end of the day, the income tax to pay on this company, for that particular financial year is $2,750.

Income tax is what actually happens and is what gets assessed at the statutory tax rates. There’s a clear difference between PAYG instalment tax for companies and individuals.

PAYG instalment tax, pay-as-you-go instalment tax, is what the tax office assesses to get their money upfront in the next financial year. It’s a cash flow item, purely and simply. They want their money upfront for the next year. The ATO takes last years actual tax amount increases it by a small amount then send a bill quarterly.

When this money is paid it goes into the detail of the integrated client account in accounting speak. So they are saying they want to cover what’s going to happen in the 2019 year. What actually happens in the year could be completely different.

And this is pure cash flow, folks.

A lot of people look at their integrated client account and say “We’re paying too much tax we don’t know where it’s going.” When it comes to instalment tax, it’s cash flow and the tax office works out what you should pay. If your activity drops you won’t have to pay the quarterly instalment amounts.

If your business activity drops my suggestion is to go and talk to your accountant and they should be able to drop the amount per quarter that you have to pay.

Ultimately, PAYG instalment tax for companies and for individuals are prepayments only, and they are cash flow items in your business. They are not the actual result, so don’t get bamboozled. Income tax is the actual tax figure.

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