Following consultations with stakeholders, including KPMG, the ATO is allowing an ‘additional method’ of calculating monthly PAYG instalments. Rather than calculating actual instalment income for the month, an entity that chooses to use the additional method will be able to make a reasonable estimate of their instalment income in each of the first two months of an instalment quarter. To then calculate the instalment in the third month, the entity will calculate their actual instalment income for the instalment quarter and subtract the amounts paid in the first two months.
Whether corporate taxpayers decide to use the actual instalment income method or the additional method, it should be noted that the method chosen to calculate monthly PAYG instalments in the first month of the income year is the method that must be used for the remainder of the year. Accordingly, important factors to consider when determining which method to use include the potential impact on cash flow and the related compliance costs.
It should also be noted that if the instalment for the third month of a quarter is negative when using the additional method, entities cannot apply for a refund. Instead they will have to revise their income of the previous instalment(s) on a last-in first-out basis. This can be done via a revised activity statement for the applicable month.
It is also important to note that the Commissioner has the power to require that an entity calculate their actual instalment income for a month or months where he determines that the entity has failed to make a reasonable estimate. Entities using the additional method who consistently report lower instalment income in the first two months of the instalment quarter may find themselves under review.