PAYG instalments are quarterly pre-payments of income tax that the ATO requires from self-employed people, investors, and others who receive income without tax withheld at source. Once your tax liability exceeds a threshold, the ATO automatically enters you into the instalment system so tax is paid progressively throughout the year rather than as a single large amount at lodgement.
Who Enters the PAYG Instalment System?
The ATO automatically puts you into PAYG instalments when your tax liability exceeds $1,000 and your notional tax (assessed in the prior year) or estimated business/investment income meets certain thresholds.
Common situations where PAYG instalments apply:
- Sole traders and self-employed — no employer to withhold tax from business income
- Investors — rental income, dividends, and interest not subject to withholding above the threshold
- Freelancers and contractors — ABN invoicing with no PAYG withholding arrangement
- People with a second source of untaxed income — investment properties, significant share income
You will receive a letter from the ATO (or a notice via myGov) advising you have entered the PAYG instalment system and what your first instalment amount is.
How Instalment Amounts Are Calculated
The ATO offers two methods:
1. Instalment amount method (ATO pre-calculates)
The ATO calculates a quarterly dollar amount based on your most recent tax assessment. This is the default. You simply pay the pre-calculated amount each quarter without doing your own calculation.
2. Instalment rate method (you calculate)
The ATO provides a rate (based on your prior year tax). You apply that rate to your actual income for each quarter. This is more accurate if your income varies significantly between quarters.
If your current year’s income is likely to be very different from the prior year — for example, you had a high-income year due to a one-off capital gain — varying your instalments is important to avoid overpaying during the year.
Quarterly Instalment Dates
PAYG instalments for individuals and small businesses are quarterly:
| Quarter | Income period | Due date |
|---|---|---|
| Q1 | 1 July – 30 September | 28 October |
| Q2 | 1 October – 31 December | 28 February |
| Q3 | 1 January – 31 March | 28 April |
| Q4 | 1 April – 30 June | 28 July |
Instalments are paid via BPAY, the ATO’s online services, or your tax agent.
How to Vary Your Instalments
If your circumstances change — lower income, a downturn in business, or a one-off prior-year item inflating the estimate — you can vary your instalments. You notify the ATO of your revised estimated income and tax when you submit each BAS or instalment activity statement.
Important: If you vary your instalments down and your actual tax liability turns out to be higher than the varied amounts, the ATO will charge a general interest charge (GIC) on the shortfall. The ATO provides a 15% shortfall threshold — if your varied instalments are within 15% of actual tax, no shortfall interest applies.
Reconciliation at Tax Time
When you lodge your annual tax return, the total PAYG instalments paid throughout the year are offset against your final tax liability:
- If instalments exceed final tax → refund
- If final tax exceeds instalments → tax bill (the shortfall, due on the assessment date)
The process is the same as an employee’s withholding reconciliation — it is just that you made the quarterly payments yourself rather than having them deducted by an employer.
PAYG Instalments vs BAS
If you are also registered for GST, your PAYG instalment obligations may be lodged on your Business Activity Statement (BAS) alongside your GST reporting. The BAS combines multiple ATO obligations into one form. If you are not registered for GST, you receive a separate Instalment Activity Statement (IAS) for your PAYG instalments.
Frequently Asked Questions
When does the ATO put me into PAYG instalments? After your tax return is assessed and your notional tax (from the return) exceeds $1,000 and meets other threshold criteria. Usually, this triggers after your first year of significant investment or self-employment income.
Can I opt out of PAYG instalments? You can exit the system if your income drops below the threshold. You notify the ATO via your activity statement. However, if you have a continuing obligation, the ATO may reinstate instalments based on your next return.
Do I pay PAYG instalments on super? No. Employer super contributions and fund earnings are taxed within the super system. PAYG instalments only apply to income in your personal tax return — wages, business income, investment income.
What if I miss a PAYG instalment payment? The ATO charges the general interest charge (GIC) on late payments. If you are experiencing financial difficulty, you can contact the ATO to arrange a payment plan.
This article provides general tax information. For advice tailored to your situation, speak with a registered tax agent or accountant. Find one through the Tax Practitioners Board register.