Pay as you go (PAYG) instalments help you budget for your income tax and keep a healthy cash flow. By making regular payments during the year you won't have to pay a large tax bill when you lodge your tax return.
When you lodge your tax return, all the amounts you've paid during the year will be offset against any tax you owe for the year.
If you pay instalments using the instalment rate (option 2) there are special rules for working out your instalment income if you are a:
- beneficiary of a trust where the trust is a taxation of financial arrangements (TOFA) entity
- partner of a partnership where the partnership is a TOFA entity
- TOFA entity (except individuals).
Individuals will only use these rules if they are working out their share of instalment income of a relevant partnership or trust.
Partners in partnerships and trust beneficiaries
If you‘re a partner or beneficiary of a TOFA entity, find out how to calculate your share of instalment income:
Example: Trust with 30 June balance date
XYZ Trust's first TOFA year was the income year ending 30 June 2018.
The trustee of XYZ Trust provided the beneficiaries of XYZ Trust with the instalment income information. The beneficiaries of the trust use the instructions at PAYG instalment for trusts to work out their instalment amount from the trust in each instalment quarter.
End of exampleTOFA entity
If you’re a TOFA entity, you‘ll use the TOFA method to calculate your instalment income.
If you are a company, trust or partnership, your instalment income is the total of:
- ordinary income – earned from business and investment activities (excluding TOFA gains)
- net TOFA income – TOFA gains minus TOFA losses. If the result is negative, use zero.
If you are a superannuation fund, your instalment income is the total of:
- ordinary income and statutory income – earned from the super fund's activities (excluding TOFA gains)
- net TOFA income – TOFA gains minus TOFA losses. If the result is negative, use zero.
When to use the TOFA method
You will start to use the TOFA method to calculate your instalment income when both of the following apply:
- We give you a new PAYG instalment rate in the first instalment quarter of an income year.
- The tax return we used as a basis to give you the new rate
- included TOFA gains and TOFA losses
- was for the 2011 income year or a later income year. For a TOFA entity with an early-balancing, substituted accounting period (SAP), this is the 2012 income year or a later income year.
Some TOFA entities can choose to start using the TOFA method one year earlier – see Apply to use the TOFA method early.
Example 1: TOFA entity with a 30 June balance date
Austin Co. made TOFA gains and losses during their income year ending 30 June 2018 (their 2018 income tax year). Austin Co. lodged their 2018 income tax return on 15 January 2019.
Austin Co. did not use the TOFA method for calculating instalment income for the two instalment quarters that followed the lodgment of their 2018 income tax return (the quarters ending 31 March 2019 and 30 June 2019). This was because the conditions for using the TOFA method had not yet been met.
Austin Co. could only use the TOFA method after we issued them a new PAYG instalment rate during the first instalment quarter of their 2020 income tax year (the 1 July – 30 September 2019 quarter). Austin Co. will use the TOFA method for calculating instalment income for that and all future instalment periods.
End of exampleExample 2: TOFA entity with a 31 December early balancing SAP
Mike Co. made TOFA gains and losses during their income tax year ending 31 December 2018 (their 2019 income tax year). Mike Co. lodged its 2019 income tax return, which included these TOFA gains and losses, on 15 July 2019.
Mike Co. did not use the TOFA method for calculating instalment income for the two instalment quarters that followed the lodgment of their 2019 income tax return (the quarters ending 30 September and 31 December 2019). This was because the conditions for using the TOFA method had not yet been met.
Mike Co. could only use the TOFA method after we issued them a new PAYG instalment rate during the first instalment quarter of their 2020 income tax year (the 1 January – 31 March 2019 quarter). Mike Co. will use the TOFA method in that and all future instalment periods.
End of exampleApply to use the TOFA method early
TOFA entities can request to start using the TOFA method one year earlier.
We will accept your request if we are satisfied it is reasonable.
To start using the TOFA method early, you must write to us at least 28 days before the end of the first quarter of an income year and:
- advise that you want to use the TOFA method for calculating PAYG instalments early
- provide the information we need to calculate a new PAYG instalment rate.
Information you need to give us
If the last tax return you lodged did not include TOFA gains and TOFA losses you'll need to provide that information to us.
If your last tax return was for an income year before the TOFA rules applied to you, you must work out what your TOFA gains and losses and other income and deductions would have been had the TOFA rules applied to you in that income year.
Once you have worked this out, you must tell us:
- your TOFA gains and losses
- all other income and deductions.
This will allow us to calculate what your taxable income would have been if the TOFA rules applied to you in that income year.
There are additional disclosures for TOFA entities that include a life insurance business, for more information see TOFA.
Where to send your notification
Send your request by mail to:
- Australian Taxation Office
Attention: Technical Leadership Group, PG&I
GPO Box 9977
MELBOURNE VIC 3001