When you were working as a solicitor, your employer set your tax aside on your behalf, however, now that you're practising as a barrister, you'll be responsible for ensuring you set aside enough to cover your tax liabilites. The way the Australian Taxation Office (ATO) helps you do this is by entering you into the Pay As You Go Instalments tax system. It’s the ATO's goal for you to pay your income tax in advance based on your prior year income levels.

You pay your PAYG instalment each quarter along with the Goods and Services Tax (GST) that you have been holding on the ATO’s behalf when you lodge your quarterly Business Activity Statement (BAS). To learn more about Business Activity Statements, read our article What is a Business Activity Statement?

One common trap we find junior barristers fall into is when they spend the money they ought to have set aside for their tax. Whether it be a matter of discipline or difficulty calculating how much you need to set aside, if you don’t stay on top of your quarterly payments, the debt can snowball and get out of control very quickly.

If you’re experiencing difficulty determining how much you need to set aside for your tax liabilities, please get in touch. We've been helping barristers with managing their tax obilgations for over 20 years.

What is PAYG?

PAYG stands for Pay As You Go. There are two different processes the ATO uses to help sole traders manage their tax obligations. These are Pay As You Go instalments and Pay As You Go withholding.

PAYG withholding

The PAYG withholding system requires sole traders to withhold an amount of tax that is in anticipation of their year-end tax liability. You report on the amount withheld either monthly or quarterly when it lodges its Business Activity Statement and when lodging an Annual Income Statement (previously called an annual PAYG summary report). As an sole trader you're responsible for collecting Pay As You Go withholding amounts from the payments you make to yourself.

PAYG Instalments

PAYG Instalments are income tax instalments paid on account of an anticipated tax liability.

Instead of paying a large tax bill once a year when you lodge your tax return, these quarterly payments go towards the expected income tax obligation accumulated from your business and investment income for the current financial year. In this way, PAYG instalments help your business to meet its income tax obligations. The PAYG Instalment amount can be calculated using the ATO rate or ATO Instalment amount.

Given you may be in your first year or two of practising as a barrister, your prior year's income as a solicitor or first year barrister may not be particularly indicative of the year to come. If you need help calculating how much needs to be set aside, get in touch with us today.

Budgeting

Key critical is the use of a budget to control your business’s finances. While your income may be difficult to project, your expenses will arrive like clockwork every month. As a sole trader, you are your business, and as such, it's not enough to budget solely for your business expenses or for your personal needs, you’ll need to ensure that both are taken into account.

Payment plans - we are expert ATO negotiators for barristers

A payment plan is a formal arrangement between your business and the Australian Taxation Office that allows your business to pay back its tax debt, preventing a large lump sum payment which may not be possible due to working capital requirements or cashflow issues.

Like other kinds of payment arrangement, a payment plan consists of an agreed repayment period and is likely to include interest on the amount payable.

At Causbrooks we have over three decades of experience helping barristers negotiate payment plans with the Australian Taxation Office (ATO). There's no one better suited to helping you speak with the ATO. For more information, see our article, what barristers need to know about negotiating a payment plan.

About Causbrooks

At Causbrooks, we’re dedicated to helping legal professionals with their taxation and accounting needs. If you’d like to discuss your own situation, please complete the form below.

We have been working with legal professionals for going on three decades and during that time we have helped many barristers in the early stages of their careers by establishing a strong foundation of tax compliance, bookkeeping, cashflow budgeting, and tax planning.

Disclaimer

Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.