Summary: In Australia, if you earn annual investment or business income over $4,000 and owed the Australian Tax Office (ATO) over $1,000 on your last financial year's tax return, you will be entered into the PAYG Instalment system and typically receive quarterly notices of estimated future tax liabilities. The ATO explains: "Pay as you go (PAYG) instalments is a system for making regular payments towards your expected annual income tax liability."

This makes perfect sense in principle but in practice I've encountered various issues:

- The PAYG Instalment terminology and communication can be very confusing and haphazard

- For individuals the ATO tracks PAYG Instalments via a separate "business" account and confusingly refers to it via any available Australian Business Number (ABN) you might have registered even if irrelevant or closed

- The ATO often gets your PAYG Instalment postal address wrong (even if the address for the related Tax File Number is correct) and so notices aren't received

- The ATO doesn't consistently issue PAYG Instalment notices in the timeframe expected

Indeed the trigger for this post was receiving a $13,745 notice of liability for it's inaccurate guesstimates of expected taxes for the 2014-15 year months after the end of that financial year, and after the tax return had been finalised and the actual, correct amount paid.

In this post I explain how PAYG Instalments work, how to manage them via your online MyGov account, how to check you aren't paying extra tax due to ATO errors, and how to resolve such errors with the minimum time wasted.

1. All about PAYG Instalments

You can read further details about PAYG Instalments at the links below. They shouldn't apply to most individual taxpayers. To be entered into the PAYG Instalment system, you should be consistently earning over $4,000 in investment or business income and owe at least $1,000 to the ATO at the end of your most recent financial year.

Importantly, you can exit once you no longer meet these criteria, but you will need to call the ATO to request this, it doesn't happen automatically.

See:
> ATO - PAYG Instalments
> ATO PAYG Instalments - Fact sheet for individuals

2. Examples of common ATO errors regarding PAYG Instalments, what to check before paying and how to resolve issues

The below screenshot of PAYG activity over just 4 months highlights many of the common errors, what to check before paying, and how to resolve the issues. On a single day (26 Nov 2015), the ATO took my PAYG Instalment liability from $0 to $17,148 and then started demanding immediate payment!

It took 4 months, multiple phone calls and eventually opening a complaint for the ATO to resolve its errors and my liability was reduced back to $0 on 30 March 2016. I never paid a cent.

- It turns out that it had failed to send a whole year's of PAYG Instalment notices to the correct address (or send them at all) and then issued them all at once via my online MyGov account.

- It issued the 4 quarterly PAYG Instalment notices for 2014-15 on 26 Nov 2015 after the end of the financial year (June 30 2015), after tax returns are due (31 Oct 2015), after a final Notice of Assessment was issued (29 Oct 2015) and after my 2014-15 taxes were fully paid (20 Nov 2015).

- The PAYG Instalment guesstimate for 2014-15 of tax liability was $13,745. This turned out to be more than twice what I ended up owing on my Notice of Assessment ($6,442). So, even if they had issued the PAYG Instalment notices during the 2014-15 financial year, I would have been paying several thousand more than I should or having to justify why my estimates were more accurate than theirs.

- As I am doing negligible paid work in 2016, my next challenge was to stop the quarterly liabilities of around $3,500 from continuing to rack up indefinitely. Individual notices can be modified (including to zero) online via MyGov for a limited period after issue (till the due date) - which is a good reason to use MyGov so that you are alerted via email rather than relying on the ATO actually getting the notice to you. To exit the PAYG Instalment system for a valid reason you need to call the ATO phone line and explain why. This, at least, appeared quite straightforward. Though I will be keeping an eye on future MyGov alerts in case the ATO re-enters me.

- Note that the ATO charges interest at over 9% so if you do have a legitimate tax liability you should resolve any issues (e.g. the amount) ASAP in order to minimise interest accruing on the legitimate balance.

- If your annual PAYG Instalment liability is less than $8,000 then you have the right to pay annually rather than quarterly. It is also simpler to vary the amount if paying just once per year.

- Note that if you vary your PAYG Instalment amounts and your estimates turn out to be much less than your annual tax liability, you could have penalty charges applied (presumably the lost interest to the ATO charged at over 9%).