What Accounts to Record PAYG Instalments

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Hi there, just wondering if anyone has an idea of how to deal with PAYG Instalments (as opposed to PAYG witheld for employees).

I am a sole trader and as such have to make provision for income tax at the end of the financial year.  I am informed on my quarterly BAS how much these will be - PAYG Instalment Amount

I have set up a current liability account called PAYG Instalments to record the amount to be paid and have been using the "Pay Tax" facility, writing Australian Taxation Office as the supplier and PAYG Instalments as the account.

The problem I have had is that Reckon has been categorising these payments as an asset (and therefore reports show a falsely positive financial position ... these payments aren't really an asset as they are to make provision for a future tax liability).

I am sure I need to set up a current liability account to record the PAYG Instalment advice I receive and then need to write a cheque to the ATO when I pay the Instalment.  I think I am using the wrong account types however - when I look at my "Net Worth" graph, my liabilities are sitting above the break even line (on top of the assets).  I have played around with this so much now that I am actually completely confused about what I have even done previously. I think I need a step by step guide on how to do this.

Am all mixed up I think....
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Fiona

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Posted 1 year ago

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Kevin Russell, Accredited Partner

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You should be posting it to Income tax paid. Its an account type OTHER EXPENSE. You are welcome. Kevin t:0407744914
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Fiona

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Thanks for that Kevin .. is it really an expense (I am just worried that it will then appear as an expense that can be used to reduce taxable income .. like materials, utilities etc).  I am not disagreeing with you, just looking for reassurance that I am not 'double dipping' if that makes sense.

Thanks again for your answer
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Kevin Russell, Accredited Partner

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Fi thats the reason I said make it a type OTHER EXPENSE. That way it comes after net profit.
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Fiona

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Got it ... thanks so much for explaining!
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Kevin Russell, Accredited Partner

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Fi this is what I do. Oh and dont tell anyone okay :)
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Linda Putland, Accredited Partner

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Hi Fiona - I use an approach that you may want to consider, that is different to Kevin's... As a sole trader - your PAYG Instalments are for your personal income tax and therefore not an expense of your business at all - I tell my clients to put this to their drawings account (which sits in the Equity area of the balance sheet) ... so as you suggested - they will reduce your net worth, which is how you expected them to be.  If you want to account for the tax bill as a future liability - then enter a bill to the ATO for the instalment, allocate the bill to your drawings account.  This will then have the amount appear in your Accounts Payable as a future liability - but will also reflect the change in your net worth through using your business funds to pay for a personal expense.

Cheers. Linda