Understanding PAYG Instalments for Rental Properties
Owning a rental property comes with tax obligations that can require more than just standard PAYG withholding on your salary. In fact, rental income may require additional PAYG instalments on top of the regular PAYG withholding for your wages.
What is PAYG?
PAYG instalments are a system used by the ATO to help taxpayers meet their annual tax obligations gradually. Instead of waiting until the end of the year to pay your full tax bill, PAYG allows you to make regular payments—typically quarterly—based on your income. This helps prevent large, unexpected tax bills and smooths out cash flow over the year.
Visit ATO for more information on PAYG instalment system.
Why is PAYG Important for Rental Property Owners?
If your rental property income exceeds $4,000 per year, the ATO may require you to make additional PAYG instalments on top of the tax withheld from your salary or wages. Rental income adds to your taxable income, and making these instalment payments allows you to manage your tax liability throughout the year, preventing a large tax payment at year-end. Additional PAYG instalments ensure that rental property owners stay on top of their tax obligations, avoiding interest charges or penalties for underpayment.
How Do PAYG Instalments Work?
The ATO will notify you if you need to start making PAYG instalments. These payments are typically calculated based on your previous tax returns, but you can also adjust your instalments based on your current income. You can choose either a fixed amount determined by the ATO or calculate your own instalments using a percentage rate of your rental income.
Example:
James earns $12,000 in rental income annually, with the Australian Tax Office (ATO) assigning an instalment rate of 8%. The total PAYG instalments for the year would amount to $960, which is divided into quarterly payments. Therefore, James would be required to pay $240 every three months to meet their tax liability.
Combining PAYG Withholding with Rental Income
If you already have tax withheld from your salary through PAYG withholding, you can adjust your withholding tax to account for your rental property income. This prevents the need for separate PAYG instalments and simplifies your tax management by consolidating everything into a single payment stream.
Example:
To illustrate how PAYG withholding can be combined with rental income, consider the earlier example James earns $12,000 annually from rental income and pays $240 quarterly in PAYG instalments. Suppose the James also earns a salary subject to PAYG withholding. He can opt to increase his withholding tax to cover both his salary and rental income obligations. For instance, by requesting his employer to withhold an additional $240 each quarter, he could cover the rental income tax without needing separate PAYG instalments, streamlining his tax payments into one system.
Annual Instalment Option
In certain cases, the ATO may offer an option to pay PAYG instalments annually instead of quarterly. This might be available if your rental income or overall income is relatively low, or if your circumstances meet the ATO’s eligibility criteria. ATO will notify you if you are eligible to pay an annual PAYG instalment.
At MKG Partners, our expert accountants are well-versed in rental property tax matters. We can help you manage PAYG instalments with ease, ensuring you meet ATO rules while optimising your tax payments. Whether it’s calculating instalments or adjusting withholding, we’ve got you covered. Contact us today to simplify your rental property tax obligations.
