What is PAYG Instalment?

PAYG Instalments are a quarterly prepayment system for income tax (sole traders and investors) and company tax (Pty Ltd). Rather than paying all tax when you lodge your annual return, you pay instalments throughout the year via the BAS. The final amount reconciles when your return is assessed.

**Who must pay instalments**

The ATO automatically enrolls you when: - You are an individual with instalment income (business or investment) of A$4,000+ AND your prior year tax payable was A$1,000+ - You are a company with a notional tax (based on prior year return) of A$500+

First-year sole traders and new companies are usually not enrolled until their first return is assessed — which means the first return often carries a large bill.

**Two calculation methods**

**Method 1 — Instalment amount (label T7):** The ATO calculates a fixed quarterly dollar amount, based on your prior year income adjusted by a GDP uplift factor (10% for FY2025–26). This is the safest choice: if you pay the ATO's amount, you cannot be penalised for underpayment even if your actual tax is higher.

**Method 2 — Instalment rate (labels T1/T2):** The ATO provides a rate (a percentage), and you multiply it by your actual current-quarter business income. This suits businesses with variable income — high-income quarters pay more, low-income quarters pay less.

**Varying an instalment**

If your income drops significantly, you can vary the instalment down using the T4 label on your BAS. Safe variation rules: if your actual tax ends up within 15% of the ATO's benchmark amount, no penalty applies. If you vary down too aggressively and the shortfall exceeds 15%, the ATO charges shortfall interest (currently 11.36% p.a. for FY2025).

**Reconciliation at year end**

All quarterly instalments are credits against your final tax liability. If you paid A$30,000 in instalments but your actual tax is A$40,000, you owe A$10,000 with your return. If your actual tax is A$20,000, you receive a A$10,000 refund. The credits are automatic — you do not need to claim them manually.

**The year-two cash flow trap**

Sole traders and new companies often face a double hit in year two: the entire prior year's tax bill falls due at the same time instalments for the new year start. Planning by setting aside 30–35% of profit from the first invoice onwards is the standard advice to avoid a cash flow crisis.