How PAYG instalments work

When your business and investment income reaches a certain amount, you’ll pay your income tax in instalments. These payments are usually quarterly. PAYG instalments help you to avoid a large tax bill after you lodge your income tax return.

If you pay with PAYG instalments, you still need to lodge an annual income tax return.

How to start paying PAYG instalments

There are 2 ways to start paying PAYG instalments.

Automatic entry

If your income is over the threshold when you lodge your income tax return, the Australian Taxation Office (ATO) will put you in the PAYG instalment system. They'll let you know:

  • the options available for calculating your instalments
  • how often you need to lodge and pay.

If your income no longer meets the threshold, the ATO will automatically remove you from the PAYG instalments system. If you want to exit the system because your situation has changed (for example, your income has reduced), you can make a request through ATO's online services.

Voluntary entry

You can plan ahead and reduce the chance of having to pay a large tax bill after you lodge your tax return. Voluntary entry is a good idea if you’re new to business or expecting to make a profit.

You can ask to enter the PAYG instalments system:

  • online through myGov (if you’re a sole trader)
  • by phoning the ATO on 13 28 66
  • through your registered tax or business activity statement (BAS) agent.

Work out your instalments

The ATO has a handy tool available to help you work out your PAYG instalments. Use the PAYG instalments calculator if you want to work out the instalment amount or rate to:

  • use when you enter PAYG instalments voluntarily
  • vary how much you’re paying
Calculate PAYG instalments

Changing your PAYG instalment amount

You can vary your PAYG instalment amount on your BAS or instalment notice if you think you might end up paying too much (or too little) tax for the year. This could happen if your business or investment income reduces or increases.

Be careful when varying your instalments. You could be charged interest as well as penalties if your changed instalments are too low.

Reporting PAYG instalments

If you're:

  • registered for goods and services tax (GST) – you report PAYG instalments on your BAS
  • not registered for GST – you report on an instalment activity statement (IAS)

The ATO will usually send you send you either a BAS or an instalment notice at the end of each instalment period.

PAYG instalments are not the same as PAYG withholding

It's important to understand the difference between PAYG instalments and PAYG withholding.

When you pay your employees, you must withhold a certain amount of tax from their pay. You then send this tax to ATO. The ATO calls this pay as you go (PAYG) withholding.

You withhold this tax on behalf of your employees. They can claim against the amount withheld at the end of the financial year.

You may also have to withhold from payments to:

  • other workers, such as contractors
  • businesses that don’t give you their Australian business number.

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