PAYG instalment labels¶

The PAYG instalment labels are where pre-payments of your own income tax appear on your activity statement. Instead of paying all of your income tax in one lump sum after you lodge your tax return, you pay smaller amounts across the year — usually each quarter. These labels show what you pay each time.

The activity statement is the form you send to the Australian Taxation Office (ATO). PAYG stands for pay as you go. Note this is different from PAYG withholding (tax you hold back from other people's pay) — PAYG instalments are towards your own income tax.

Why this matters¶

If the ATO has put you into PAYG instalments, these labels appear on your statement and you need to know what to do with them. Understanding them helps you avoid a large tax bill at the end of the year, because you have already paid some of it along the way.

What you will learn¶

• What PAYG instalments are and where they appear
• The two options for working out your instalment
• That you can vary the amount or rate if your income changes

Understanding the concept¶

When your business or investment income reaches a certain level, the ATO asks you to pay your income tax gradually through the year, rather than all at once. These are your PAYG instalments. The ATO generally gives you a choice between two options.

Option 1 — pay the amount the ATO worked out for you. The ATO calculates a single figure for you, based on your last tax return, and you simply pay that amount. This is the simplest option — there is nothing to calculate.

Option 2 — work it out yourself. Here you use two numbers on the statement:

• T1 – instalment income — your income for the period (generally your gross business and investment income, excluding GST).
• T2 – instalment rate — a percentage the ATO has already worked out for you and pre-filled, based on your last tax return.

You multiply your T1 income by the T2 rate to get the amount to pay. Because Option 2 is based on your actual income each period, the amount moves up and down with how much you earn.

Whichever option you use, the ATO lets you vary your instalment if your circumstances change — for example, if your income drops and the pre-set amount or rate now looks too high (or too low). Varying is optional, and the ATO explains how to do it on the statement.

Example¶

Priya is a sole trader whom the ATO has placed on quarterly PAYG instalments. On her statement she sees Option 1 — a single figure the ATO worked out, say $1,500 — which she can simply pay. She also sees Option 2, where she could instead take her instalment income for the quarter (T1) and multiply it by the pre-filled instalment rate (T2).

This quarter her income was lower than usual, so paying the ATO's fixed $1,500 would mean over-paying. Priya chooses Option 2 so the amount follows her actual income for the period. If her income had fallen sharply, she could also have varied her instalment. Either way, each payment counts towards her income tax for the year, so her final bill is smaller.

Common mistakes¶

• Confusing PAYG instalments with PAYG withholding — instalments are towards your own income tax; withholding is tax you hold back from others.
• Thinking an instalment is an extra tax — it is a pre-payment that reduces your end-of-year bill.
• Switching options mid-year — for quarterly payers the option generally cannot be changed for the rest of the income year once chosen.

How this works in myaccountant¶

Key points¶

• PAYG instalments are pre-payments towards your own income tax.
• They usually appear each quarter on your activity statement.
• Option 1 is to pay the single amount the ATO worked out for you.
• Option 2 is to work it out yourself — T1 income times the T2 rate.
• You can vary the amount or rate if your income changes.
• Each instalment reduces your tax bill at the end of the year.

Learn next¶

• W2 — PAYG withholding
• W4 — Withholding where no ABN was quoted
• G1 — Total sales

General information only — not tax, super or financial advice.