Australian Convenience Store News | January/February 2000 - Accounting : PAYG

Accounting
July/August 2000

PAYG - Whatís it all about

By Geoff Coy, Certified Practising Accountant

Geoff Coy looks at the new obligations imposed on small business operators as they contend with the NEW TAX SYSTEM

One other aspect of the New Tax System that goes hand in hand with GST is the Pay As You Go System or PAYG.

As of 1 July 2000 the PAYE, PPS, RPS and Provisional tax systems will not exist. They will be replaced with PAYG.

There are two components to the PAYG system. They are:

PAYG Instalments
This system will replace provisional tax and will apply to individuals in receipt of:

The way in which PAYG instalments will be calculated is radically different to the present system. In many cases the instalments will be based upon actual income derived rather than last yearís income.

Due dates for instalments will also change.

PAYG Withholding
ëWithholdingí is the process by which you deduct amounts from payments to others and remit these amounts to the ATO e.g. current PAYA group tax deducted from employeesí wages.

From an employeeís perspective, nothing much will change. Employees will continue to have tax deducted from their salary and wage payments at prescribed rates.

This system also included company and superannuation fund instalments.

Under PAYG instalments most business operators will pay their instalments at the same time 21 days after the end of a quarter. The one quarterly payment will include all tax obligations e.g. tax instalments, withholdings, GST and FBT.

The single form used to record your business withholding payments is the Business Activity Statement (BAS).

Illustrated Example
Conís Convenience Store Pty Limited has applied for and been allocated an Australian Business Number (ABN) under the New Tax System. The company has also registered for GST and will remit payments on a quarterly basis. Previously Con was classified as a ëmedium taxpayerí.

Conís likely company tax for the 1999-2000 year is $40,000

Under the previous tax system Con would have paid instalments of $10,000 each on 1^stJune, 1^st September and 1^st December with the balance due on 1^st March i.e.:

Under the New Tax System the June and September instalments will continue to be made but the third instalment will not be required (yet).

Conís accountant then calculates the actual tax at $50,000.

This means that Con is able to defer $21,000 of his tax liability (being 42% of $50,000 assessed tax) by way of 21 quarterly instalments of $1,0000 each.

The final instalment under the existing tax system will be $9,000. This being the outstanding liability less the deferred amount of $21,000. This payment would be due in March 2001.

Conís new payment schedule will now be:

Repayment of the deferred tax begins with the first PAYG instalment falling due after the due date for payment of the assessed tax for the 1999-200 income year. Therefore Conís company would be due for its final instalment of 1999-2000 assessed tax on 15^th March 2001. The first PAYG instalment after this is 21 April 2001 when repayment of the deferred tax would commence.

The reason behind this transitional measure
The transitional measure is designed to minimise the impact on business cashflow that would otherwise be overlapped by payments under the existing company and superannuation fund instalment system and the new PAYG instalment arrangements.

If you are confused by these arrangements then you should be prepared to keep track of all 21 deferred instalments until they are paid.

If your deferred payment is small or within your business cashflow requirements then it maybe more appropriate to pay the amount in full rather than contend with keeping track of the instalment payments.

The New Instalments Method
Under the existing Tax System businesses paid their tax instalments based on the

previous yearsí income.

Under the new tax system instalments will be calculated from instalments income.

The basic rule is that a business taxpayer will be liable to pay PAYG instalments where the business has been given an instalment rate by the ATO.

No liability to pay instalments will arise unless an instalment rate has been given

The ATO will advise your business of your instalment rate either:

Calculating the Instalment
The ATO notifies Con that his company will be required to pay PAYG instalments and that the instalment rate will be 2.5%.

This instalments rate was worked out by the ATO from information in Conís last company tax return.

Con will than apply this rate to the quarterly turnover of his business to calculate the PAYG instalment to be included in his quarterly BAS return.

For example the annual turnover of Conís business is $2,000,000. Quarterly sales and calculated PAYG instalments are:

Notice how the calculated quarterly instalments vary according to the changing business turnover. This method of payment is far more fair and equitable to the business as it brings the instalments into line with business cashflow.

Business Activity Statement (BAS)
In the BAS for Jan to March 2001 Con will remit the following:

PAYG instalment company tax = 12,500

PAYG withholding - deductions from employees wages = 12,000

GST Obligations GST collected less input tax credits = 6,000

Increased Record Keeping Obligations on Small Business
The New Tax System places greater obligations than ever before on small business operators to keep adequate business records.

Itís not only a matter of tracking GST collected from sales and imput tax credits on payments.

Payments deducted from employees, contractors and ABN withholdings need to be included with PAYG instalments for company tax and offset against deductions made from interest received and the ëonce offí Wholesale Sales Tax Credit (WST).

A Tip !!
Be careful not to over claim on input tax credits.

Many small business operators will claim credits they are not entitled to make.

Remember due to phasing in provisions, GST on items such as new motor vehicles and CTP ëgreen slipsí cannot be claimed back in the first twelve months.

Remember also that some items of business expenditure donít include GST. Examples are vehicle registration and bank charges.

On the other hand credit card charges will include GST.

One of the most complex areas is motor vehicle expenses, where an input tax credit can only be claimed for creditable purposes. If a vehicle is not used 100% for business then input tax credits should only be claimed on a direct apportionment method such as a log book.