The quick answer
PAYG instalments are regular prepayments of the expected tax on your business and investment income. They are not an additional tax.
The ATO may enter you into the system automatically once your latest tax return and notice of assessment meet certain thresholds.
What you pay is counted when you lodge. The instalments paid during the year are offset against your tax in your tax return.
The harder part: knowing whether the amount the ATO has worked out still fits your year, and what to do if it doesn’t.
The idea is simple. The amount is the hard part.
When you earn business or investment income, no employer is taking tax out along the way. PAYG instalments are how the tax on that income is paid during the year, instead of all at once after it.
For individuals and sole traders, the ATO says automatic entry happens when all three of these apply:
Instalment income from your latest tax return of $4,000 or more, tax payable on your latest notice of assessment of $1,000 or more, and estimated (notional) tax of $500 or more.
The amount the ATO asks for is worked out from your most recent tax return and adjusted for likely growth in your income. So it reflects last year, not necessarily this one.
That is where the questions start: a strong year followed by a quieter one, income that has grown faster than last year’s return suggests, or a business that has changed or stopped.
Two sole traders, same notice, different outcomes
Two sole traders receive similar instalment amounts from the ATO. One pays them and ends the year with little or nothing left to pay. The other ends the year with a bill, or with money paid in advance that wasn’t needed.
The difference comes down to how each one’s income changed during the year, how the instalments were worked out, and whether the amount was checked against what was actually happening.
Six questions that decide what you pay, and when
QUESTION 1
Does last year still look like this year?
The ATO’s figure starts from your most recent tax return. A change in income can leave it too high or too low.
QUESTION 2
Instalment amount, or instalment rate?
There are two ways instalments can be worked out, and they respond differently when income goes up or down.
QUESTION 3
Should you vary it?
You can vary an instalment when you lodge. If your varied instalments are less than 85% of your total tax payable, you may have to pay a general interest charge on the difference.
QUESTION 4
How often should you be paying?
Most taxpayers pay quarterly. Depending on your circumstances, the ATO may offer two instalments a year or one annual instalment.
QUESTION 5
Is anything overdue?
Instalments have due dates, and a missed one doesn’t go away at tax time.
QUESTION 6
Do you still need to be in the system?
If you are no longer earning business or investment income, you may be able to exit.
There is no single answer to any of these. Each one depends on your own situation. Working them out is what we do every day.
What getting it wrong can cost
A large bill at tax time, because instalments were skipped or set too low.
Interest, and possibly penalties, after a variation that was too low. The ATO says a general interest charge may apply where varied instalments are less than 85% of your total tax payable.
Money paid in advance that wasn’t needed, because instalments based on a strong year were paid through a weaker one.
Interest on instalments paid late.
Does this sound like you?
I’ve just received my first PAYG instalment notice.
My income this year is very different from last year.
I’m not sure whether the amount is right.
I’ve stopped my business, or gone back to a job.
I varied my instalments and I’m not sure I got it right.
I’ve missed an instalment.
I’d rather be working than doing paperwork.
If even one of these is you, it’s worth a quick conversation. Sorting it out early is almost always easier than fixing it after the ATO gets in touch.
Common questions
Is this an extra tax?
No. PAYG instalments are prepayments of the tax expected on your business and investment income. When you lodge your tax return, the instalments you have paid are offset against your tax.
Can I change the amount?
Yes. You can vary it when you lodge your activity statement or instalment notice, on or before the day the instalment is due. If your varied instalments end up below 85% of your total tax payable, a general interest charge may apply, so the estimate matters. We can work it out with you.
Why did I get a notice when I’ve never had one before?
The ATO enters individuals and sole traders automatically when the thresholds are met, based on the latest tax return and notice of assessment. So a notice can follow a return that showed business or investment income.
How much does it cost?
It depends on your situation, so we give you the fee before any work starts. Asking for a quote costs nothing.
