PAYG Instalments Explained
A plain-English guide for small businesses, sole traders and investors from S & H Accountants, Cranbourne
Received a PAYG instalment notice from the ATO and not sure what it means? At S & H Accountants, a Cranbourne accounting and tax practice serving clients across south-east Melbourne, this is one of the questions we are asked most. This guide explains what PAYG instalments are, who has to pay them, how they are calculated and the 2026–27 due dates.
What are PAYG instalments?
PAYG (pay as you go) instalments are regular prepayments of your income tax on business and investment income, paid during the year rather than in one lump sum at tax time. They are not an extra tax – every dollar you pay is credited against your final tax bill when your return is lodged.
Employees already have tax taken out of each pay. PAYG instalments do the same job for income that has no tax withheld, such as business profits, rent, interest, dividends, trust distributions and capital gains. The aim is simple: no large, unexpected tax bill when your return is assessed.
Who has to pay PAYG instalments?
You only pay PAYG instalments once the ATO notifies you, usually after you lodge a tax return showing business or investment income. Individuals (including sole traders) and trusts are automatically entered when their latest return shows all three of:
- instalment income of $4,000 or more
- tax payable of $1,000 or more on the latest notice of assessment
- estimated (notional) tax of $500 or more.
Companies and super funds are also entered based on their latest return. If you are expecting a jump in business or investment income, you can choose to enter voluntarily so tax is spread across the year. The ATO’s entry rules can change, so we confirm your position each year.
How are PAYG instalments calculated?
Most quarterly payers can choose between two methods. The ATO bases both on your most recent tax return.
| Option 1 – Instalment amount | Option 2 – Instalment rate | |
| What you pay | A fixed dollar amount set by the ATO | The ATO’s rate (%) × your actual instalment income for the quarter |
| How it’s set | Last year’s tax, increased by the GDP adjustment (5% for 2026–27) | Rate from your last return; you apply it to each quarter’s income |
| Suits | Steady, predictable income | Seasonal or changing income |
| Effort | Low – pay the amount on your activity statement | Higher – needs up-to-date bookkeeping each quarter |
The GDP adjustment is applied because incomes generally rise over time; without it, instalments based on last year would usually fall short. It does not apply if you use the rate method or pay annually.
When are PAYG instalments due in ?
Most clients pay quarterly, generally 28 days after each quarter ends (the December quarter is due in February).
| Quarter | Period | Standard due date |
| Q1 | 1 July – 30 September | 28 October |
| Q2 | 1 October – 31 December | 28 February Following Year |
| Q3 | 1 January – 31 March | 28 April |
| Q4 | 1 April – 30 June | 28 July |
Where we lodge your activity statements electronically as your registered tax agent, later due dates may apply – we will tell you the exact date for each quarter. Some smaller taxpayers can instead pay a single annual instalment, and very large businesses pay monthly.
What happens at tax time?
When your return is lodged, all instalments paid during the year are credited against the tax assessed. If you paid more than your tax, you get a refund; if you paid less, you pay the difference.
Example: Sarah is a sole trader with an ATO instalment amount of $6,500 per quarter.
| Amount | |
| Instalments paid (4 × $6,500) | $26,000 |
| Tax assessed on her 2026–27 return | $27,500 |
| Balance payable after lodgement | $1,500 |
Without instalments, Sarah would have faced the full $27,500 in one payment. After lodgement, the ATO also recalculates her instalments for the next year based on the new return.
Can I vary my PAYG instalments?
Yes. If your income this year is likely to be noticeably higher or lower than last year, your instalments can be varied up or down. Common reasons include losing a major customer, selling an investment property, or a big jump in sales.
Variations must be based on a realistic estimate. If you vary your instalments down and the total paid ends up well below your actual tax (generally less than 85%), the ATO can charge general interest charge (GIC) on the shortfall. Please talk to us before varying – we will estimate your tax first so the new figure is defensible.
If your business or investment income stops altogether, we can also ask the ATO to remove you from the instalment system.
PAYG instalments vs PAYG withholding
These are often confused but are separate systems:
- PAYG instalments – prepayments of your own income tax on business and investment income.
- PAYG withholding – tax you deduct from your employees’ wages and pass on to the ATO.
Both can appear on the same activity statement, so it is worth checking which figure is which.
Frequently asked questions
Are PAYG instalments an extra tax?
No. They are prepayments of the income tax you would otherwise pay in one go after lodging your return.
What if I cannot afford an instalment?
Contact us before the due date. Depending on your situation, we can review a variation or discuss a payment arrangement with the ATO.
Do I get my PAYG instalments back?
If your total instalments are more than the tax assessed on your return, the excess is refunded or offset against other ATO debts.
Talk to a Cranbourne accountant about your PAYG instalments
- Set aside money for each instalment in a separate account as income comes in.
- Pay by the due date – late payments attract GIC.
- Tell us early if your income changes significantly so we can review whether a variation makes sense.
- Keep your bookkeeping current, especially if you use the rate method.
As part of our tax and compliance service – bookkeeping, BAS and activity statements, tax returns and PAYG withholding – we check your instalment amounts each quarter and advise on variations. Our CFO service clients also get tax forecasting built into their cash-flow planning, so instalments are never a surprise. We also help clients set up and register companies and trusts.
Questions? Email info@sahtax.com.au or visit www.sahtax.com.au.
S & H Accountants Pty Ltd · L1, 63B High St, Cranbourne VIC 3977
This guide is general information only and does not consider your personal circumstances. Please contact us before acting on it.
