PAYG instalments¶

Most people who earn wages have tax taken out of every pay, so they are not hit with one big bill at the end of the year. PAYG instalments do the same job for business and investment income. PAYG stands for pay as you go.

Instead of waiting until you lodge your tax return, you make regular pre-payments towards your own income tax during the year. You pay them on your Activity Statement — the form you send the Australian Taxation Office (ATO) — and they are counted towards your final tax bill when you lodge.

In one line

PAYG instalments are regular pre-payments towards your own income tax for the year, paid on your Activity Statement and credited when you lodge your tax return.

Why this matters¶

If your business or investments make a profit, tax is owed on it. Without instalments, that tax would build up all year and land as one large bill at tax time. Paying a bit each quarter spreads the cost and makes it far easier to manage cash flow, so you are not caught short.

What you will learn¶

What PAYG instalments are and why the ATO uses them
How you pay them and how they are credited at tax time
How PAYG instalments differ from PAYG withholding

Understanding the concept¶

The ATO explains that PAYG instalments are regular pre-payments of the expected tax on your business and investment income. Here is how they work.

The ATO usually puts you in. The ATO generally enters you into the instalments system based on the income shown in your last tax return. Once you earn enough business or investment income and have tax to pay on it, the ATO notifies you that you are in the system. (You can also choose to enter voluntarily.)

You pay regularly. Most people pay instalments once every three months (quarterly) on their Activity Statement. The ATO can work out an instalment amount for you, or give you a rate to apply to your income for the period.

They are credited at tax time. The instalments you pay during the year are not an extra tax. When you lodge your tax return, they are credited against your income tax for the year. If you have paid more than your final tax, the difference is refunded. If you have paid less, you pay the shortfall.

Because your income can change, the ATO lets you vary an instalment if the amount looks too high or too low for your situation.

How this differs from PAYG withholding¶

This is the key contrast, and it trips people up.

PAYG withholding is tax you take out of payments to other people (your employees) and send to the ATO. It is not your tax.
PAYG instalments are pre-payments of your own income tax. It is your tax, paid early.

Same three letters, opposite direction.

For accountants & bookkeepers

The ATO calculates an instalment amount or rate from the client's most recent tax return and adjusts it for likely income growth. Individuals, sole traders and trusts are generally entered automatically once instalment income and tax payable pass the ATO's entry points. Instalments paid across the year are credited on assessment, so they reduce the final balance rather than adding to it. Clients can vary if the ATO figure no longer reflects expected income, but under-varying can attract interest.

Example¶

Jordan is a sole trader whose graphic-design business has grown quickly. After lodging a tax return showing a healthy profit, the ATO writes to say Jordan has been entered into PAYG instalments.

Each quarter, Jordan's Activity Statement now shows a PAYG instalment amount — say around $2,500. Jordan pays it along with the rest of the statement. Over the year that adds up to roughly $10,000 pre-paid.

When Jordan lodges the tax return and the final tax works out to $11,000, the $10,000 already paid in instalments is credited against it. Jordan only has to find the last $1,000 — instead of a single $11,000 bill.

Common mistakes¶

Thinking instalments are an extra tax — they are credited against your final bill.
Mixing them up with PAYG withholding, which is about other people's tax, not yours.
Ignoring an ATO letter that says you have been entered into the instalments system.
Not varying an instalment when income has clearly dropped, and tying up cash you will only get back at tax time.

How this works in myaccountant¶

In the app — when you prepare your Activity Statement, myaccountant shows your PAYG instalment amount alongside your other obligations, so you can see what is due and pay it as part of the statement.

Key points¶

PAYG instalments are pre-payments towards your own income tax for the year.
The ATO generally enters you based on the income in your last tax return.
You usually pay them quarterly on your Activity Statement.
They are credited against your income tax when you lodge your return.
They are not an extra tax, and you can vary them if income changes.
They are the opposite of PAYG withholding, which is tax on other people's pay.

Learn next¶

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

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