AVOID THE TAX INSTALLMENTS TRAP

Don't Get Caught Short Like Elisa* Did

If you're a self-employed psychologist or running your own practice, it's easy to think you're doing the right thing by paying your tax instalments each quarter. But what if your income has increased this year? That’s where many people get caught out.

Take Elisa*, for example. She diligently paid her tax instalments each quarter through her BAS. When she came to us at tax time, she expected to be on track—only to find she still owed an extra $10,000. Why? Because her instalments were based on last year’s income, not this year’s.  You can imagine how shocked she was.

The ATO’s pay-as-you-go (PAYG) instalment system uses your previous income to estimate what you’ll need to pay this year. But if your income has gone up—even just a little—those estimates can fall short fast.

Here’s the trap:You think you’re covered because you’ve paid your instalments, but you’re actually underpaying if your income has increased.

How to avoid the shock:

• Every time you receive income, put aside 30% into a separate tax savings account Keep in mind that your BAS instalments are based on last year’s numbers—not your current earnings

• If your income has increased, consider varying your instalment amount (we can help you do this)

• Track your own progress

A little forward planning can save you a lot of stress at tax time. It’s far better to have some money left over than to find yourself unexpectedly short.

*not her real name