Pay as you go (PAYG) instalments is a system for paying instalments towards your expected end-of-year income tax liability on your business and/or investment income for the current income year.
PAYG instalments are not a separate tax. Your actual tax liability is computed when your annual income tax return is assessed, and any instalments paid will be offset against that liability. You will then be asked to pay the shortfall. If too much tax has been paid, you will receive a refund
The ATO evaluates your status for PAYG instalments once your most recent income tax return is assessed. If required to join the system, the ATO will notify accordingly.
If you are required to pay PAYG instalments, the ATO will write to you and notify you of an instalment amount or instalment rate The instalment amount is calculated from information in your last assessed income tax return, and based on the assessed income for that year. The rate calculation usually is a percentage of your business income
Income on which instalments are based will usually comprise income not taxed at source eg interest, dividends, rent, ESS discounts, business income
PAYG instalments are generally paid quarterly. Some taxpayers pay two instalments a year and some have an annual instalment option. If required to pay the instalments, you will be notified by the ATO and the frequency
As mentioned, your PAYG instalments for the year are credited against your assessment to determine whether you owe more tax or are owed a refund.
Depending on the timing of your tax return lodgment, you may find you are required to pay a full year’s liability or top up, in, say, the last quarter of the year.
As an example – if you lodge your return for 2024 in April/May 2025, and it is determined you will be required to pay instalments for 2025, you may be called upon to pay the full amount for the 2025 year (based on the 2024 tax assessment), by 30 June 2025. Thereafter, instalments for the 2026 year will be paid (usually) quarterly
You can vary your instalments if you believe using the amount or rate notified by the ATO will result in you paying more than your expected tax liability. To do this you need to be able to reliably estimate the tax on your business and/or investment income.
You may be liable to pay interest if your varied instalment amount or rate is based on an estimate that is less than 85% of the actual tax payable on your investment and business income. You will not be liable to interest if you use the instalment amount or rate notified by the ATO, even if this results in you under paying your instalment.
