PAYG Instalments Explained: Why the ATO Wants Tax Early
PAYG instalments are pre-payments towards your own income tax, which the ATO collects during the year instead of waiting for you to lodge and pay the whole bill at once. If you're a sole trader, partner, trust or company earning business or investment income, the ATO puts you on them automatically once a tax return shows enough profit. They aren't extra tax — every instalment is credited against your assessment — so the real question is when you pay, not how much.
Why the ATO wants your tax early
Employees pay tax every payday through withholding. Nobody withholds anything from a business owner's invoices, so without instalments the ATO would wait a year or more for its money and you'd face a bill many first-timers haven't put aside. Instalments spread that bill across four payments.
The catch is timing, and it bites hardest in your second year. In year one nobody asks you for tax. You lodge your first return — as late as October, or the following May through a registered agent — and pay the full year's tax. Because that return shows business income, the ATO enters you into instalments at the same time, so within months you're paying last year's tax in full and this year's first instalment. That overlap catches more new businesses than any other tax event.
Who gets put on PAYG instalments
The ATO decides from your most recent tax return — there's no application, just a letter or myGov message.
| Taxpayer | You enter when... |
|---|---|
| Individuals (including sole traders), partners and trusts | All three apply: instalment income of $4,000 or more on your latest return; tax payable of $1,000 or more on your latest notice of assessment; and estimated (notional) tax of $500 or more |
| Companies and super funds | Any one applies: instalment income of $2 million or more; notional tax of $500 or more; or you're the head company of a consolidated group |
Two terms to know. Instalment income is your gross business and investment income — before expenses, excluding GST and capital gains. Salary and wages aren't counted, so an employee with a side business or rental property can be pulled in. Notional tax is the ATO's estimate of the tax you'll owe on that income this year, based on last year's return.
Entering voluntarily
You can ask to go on instalments before the ATO makes you. Estimate your tax with the ATO's PAYG instalments calculator, then request entry through myGov, Online services for business, your tax agent or by phone. Many accountants recommend it in year one to avoid the second-year squeeze.
Getting off them
The system works in reverse. Individuals are removed automatically when their latest return shows instalment income under $4,000 or notional tax under $500 (among other conditions); companies drop out when their rate is zero or notional tax is under $500 and instalment income is under $2 million. If you no longer expect to meet the thresholds, request an exit through myGov (Tax, then Manage, then Tax registrations), Online services for business or your agent. Exiting doesn't remove the tax — it's due in full at assessment instead.
Instalment amount vs instalment rate
Your activity statement offers two ways to work out each instalment. Most small businesses can use either, and the choice you make on the first statement of the income year applies for that year.
Option 1: instalment amount. The ATO takes the tax from your most recent return, uplifts it by a GDP adjustment factor to allow for growth, and splits it into four. The factor for 2026-27 is 5% (as at September 2026). If last year's tax was $12,000, this year's instalments are based on $12,600 — about $3,150 a quarter.
Option 2: instalment rate. The ATO gives you a percentage: notional tax divided by instalment income, times 100. You apply it to the instalment income you actually earned in the quarter. Using the same numbers, $12,000 of tax on $150,000 of income gives a rate of 8%: a $30,000 quarter means a $2,400 instalment, a $15,000 quarter $1,200.
The amount method suits steady income and owners who want zero admin, but it ignores what's actually happening this year. The rate method suits seasonal or falling income because it self-corrects each quarter — though as a fixed percentage of turnover, it keeps charging on sales even if margins shrink.
Quarterly, annual or twice a year
| Cycle | Who | Due dates |
|---|---|---|
| Quarterly (default) | Most instalment payers | 28 October, 28 February, 28 April, 28 July |
| Annual | Notional tax under $8,000, and you're not required to be registered for GST (or you're voluntarily registered and pay GST annually), and you're not in an instalment or consolidated group or GST joint venture | 21 October, one payment for the whole year |
| Two instalments | Primary producers and "special professionals" (authors, performers, sportspeople, inventors) | 75% of the year's instalments by 28 April, the rest by 28 July |
| Monthly | Generally only taxpayers with instalment income of $20 million or more | 21st of the following month |
The ATO tells you if you're eligible for annual instalments; elect before your first quarterly instalment falls due. A due date on a weekend or public holiday rolls to the next business day — 28 February 2027 is a Sunday, so that quarter is effectively due Monday 1 March 2027. If your instalment rides on a quarterly BAS lodged online or through an agent, the BAS extensions apply to it too; on an instalment notice, pay by the printed date. Our BAS due dates guide has every date and extension.
How instalments appear on your BAS
If you're registered for GST, the instalment is a section of the same activity statement as your GST and any PAYG withholding — see our BAS and GST explainer for how the form fits together. If you're not registered for GST, the ATO sends an instalment notice instead, and there's nothing to lodge unless you're varying it; you just pay.
| Label | Method | What goes there |
|---|---|---|
| T7 | Amount | The ATO's pre-filled instalment amount |
| T8 | Amount | Your estimated tax for the whole year (only if varying) |
| T9 | Amount | Your varied instalment for this quarter (only if varying) |
| T1 | Rate | Your instalment income for the quarter (gross, excluding GST) |
| T2 | Rate | The ATO's pre-filled instalment rate |
| T3 | Rate | Your varied rate (only if varying) |
| T4 | Both | Reason code for the variation |
| 5A | Both | The instalment payable — flows into the statement total |
For a walk-through of the online form, read how to lodge your BAS online.
Varying instalments when income falls
The ATO's figure is based on last year. If this year looks different — trading has dropped, you've closed a line of business, made a large deductible purchase or are using carried-forward losses — you can vary the instalment to match your own estimate. You can also vary up if a strong year is coming and you'd rather not face a big balance later.
How to vary
- Amount method: enter your estimated tax for the full year at T8, your varied instalment for this quarter at T9, and a reason code at T4.
- Rate method: enter your new rate at T3 and a reason code at T4, then apply it to T1.
- Instalment notice only: complete the variation labels and lodge the notice rather than just paying.
Lodge the variation on or before the instalment's due date and before you lodge your tax return for the year. Once made, the varied amount or rate applies to every remaining instalment for that income year until you vary again — an October variation carries through February, April and July unless you revisit it.
The ATO's reason codes run from 21 to 27 plus 33. For a small business with a soft year the usual one is 23, "significant change in trading conditions".
The penalty risk if you under-vary
After you lodge, the ATO compares your varied instalments with the tax you actually owed. If they total less than 85% of your final tax, the ATO can charge the general interest charge (GIC) on the shortfall, backdated to each instalment's due date. GIC is 11.43% a year for July to September 2026 (as at September 2026), compounds daily, and since 1 July 2025 is no longer tax deductible. Penalties can follow where the ATO decides your estimate wasn't reasonable or the statement was false or misleading, and it has flagged repeated variations used purely to help cash flow as a focus area.
The protection is simple: base the variation on a genuine forecast and keep the working. A spreadsheet showing year-to-date profit, the pipeline for the rest of the year and the resulting tax estimate is what "reasonable care" looks like. Varying because business is down is legitimate; lowballing because the quarter is tight is not.
Late payment is separate: unpaid instalments accrue GIC from the due date, and a late BAS attracts a failure-to-lodge penalty of one penalty unit ($364 from 1 July 2026) per 28 days, up to five units for a small business. Lodge on time even if you can't pay.
How instalments credit against your tax return
When you lodge, the ATO totals the instalments raised for the year and subtracts them from your assessed tax. Pay more than you owed and the excess is refunded; pay less and the balance is due by the date on your notice of assessment.
Two nuances trip people up. The instalment due 28 July belongs to the year that has just finished, even though you pay it after 30 June. And the credit is for instalments raised, so a skipped instalment still counts on the assessment but sits as a debt (with interest) on your ATO account, quietly absorbing any refund.
Planning cash for instalments
Instalments only hurt when they arrive unplanned. A few habits make them routine.
- Open a separate tax account and move 25% to 30% of every payment into it — enough for income tax for most sole traders, with room for GST.
- Put every due date in your forecast. Our 13-week cash flow forecast template has a row for PAYG instalments; enter the real dates.
- Budget for the year-two double hit, when last year's tax and this year's first instalments overlap.
- Use the rate method if you're seasonal, so a dead winter quarter doesn't carry a flat quarter of last year's tax.
- If a quarter is genuinely bad, vary early rather than skipping the payment. If you can't pay, lodge anyway and set up a payment plan through Online services — self-service plans cover debts up to $200,000 (as at September 2026).
For the wider discipline of matching money in to money out, see our guide to cash flow management for small business.
Key takeaways
- PAYG instalments are pre-payments of your own income tax, credited in full when you lodge — they change when you pay, not how much.
- Individuals, sole traders and trusts enter at instalment income of $4,000+, tax payable of $1,000+ and notional tax of $500+; companies at $500+ notional tax or $2 million+ instalment income.
- The amount method uplifts last year's tax by the GDP factor (5% for 2026-27) and splits it in four; the rate method applies a fixed percentage to actual quarterly income.
- Quarterly instalments are due 28 October, 28 February, 28 April and 28 July; eligible annual payers pay once, on 21 October.
- Vary by the due date using T8/T9 or T3 plus a T4 reason code — but instalments under 85% of your final tax attract non-deductible GIC at 11.43% a year (as at September 2026), backdated.
- Set aside a fixed share of every payment, forecast the dates, and consider entering voluntarily in year one to dodge the double hit.
Where to get help
- ATO — PAYG instalments hub (entering, exiting, calculating and varying): ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments
- ATO — PAYG instalments calculator: ato.gov.au/calculators-and-tools/payg-instalments-calculator
- ATO — General interest charge rates: ato.gov.au/tax-rates-and-codes/general-interest-charge-rates
- ATO by phone: 13 28 61 (individuals and sole traders) or 13 28 66 (businesses).
- Your registered tax agent or accountant: to check a variation estimate before you lodge it and to pick a method.
Frequently asked questions
What are PAYG instalments?
PAYG instalments are pre-payments towards your own income tax, usually made quarterly, so the bill on your business and investment income is spread across the year instead of landing in one lump after you lodge. They're not an extra tax: every instalment is credited against your assessment when you lodge your return, and if you've paid too much the difference comes back as a refund.
Why has the ATO put me on PAYG instalments?
Because your latest tax return tripped the entry thresholds. For individuals, sole traders and trusts that means business and investment income of $4,000 or more, tax payable of $1,000 or more on your notice of assessment, and estimated (notional) tax of $500 or more. Companies and super funds enter if their notional tax is $500 or more or their instalment income is $2 million or more. Salary and wages don't count, but a side business or rental property can put you in.
Can I vary my PAYG instalment to zero?
Yes, if you genuinely expect to owe no tax on your business and investment income this year — for example the business has closed or is running at a loss. Enter your estimated tax at T8 (or a varied rate of 0% at T3), the varied amount at T9 and a reason code at T4, and lodge by the due date. If your varied instalments end up below 85% of the tax you actually owe, the ATO can charge general interest on the shortfall, so keep the working that justified your estimate.
What happens if I don't pay my PAYG instalment?
The unpaid amount sits on your ATO account accruing the general interest charge — 11.43% a year for July to September 2026, compounding daily and no longer tax deductible. If the instalment is on a BAS you also risk a failure-to-lodge penalty of $364 per 28 days (up to five units) if the statement itself is late. If you can't pay, lodge anyway and set up a payment plan online; instalments don't vanish at tax time, they still count as owed.
Are PAYG instalments the same as PAYG withholding?
No. PAYG withholding is tax you take out of your employees' wages and send to the ATO on their behalf. PAYG instalments are pre-payments of your own income tax on business and investment income. Both can appear on the same BAS, which is where the confusion starts, but they're separate obligations reported at separate labels.
General information only. This guide doesn't take your personal or business circumstances into account and isn't financial, legal or tax advice. Rates and thresholds change — check the official sources linked in this guide and get qualified advice where your circumstances require it.