EGU
Principled Wealth Management, Practical Business Advisory, Precise Accounting and Taxation
egu-chess-board.jpg

Insights

Insights

An easy explanation of the quarterly PAYG system and how it works

The Pay As You Go (PAYG) system in Australia is actually two systems. PAYG Withholding is the tax an employer withholds from wages and salaries — the subject of this month's companion article. PAYG Instalments is the system through which people who earn business or investment income pre-pay their tax to the Australian Taxation Office in quarterly instalments, rather than facing a single large bill at year-end.

This piece is about the second system: what it is, who enters it, when instalments are due, how the amount is calculated, and what to do when circumstances change.

Why the system exists

Tax on wages is collected as you go — every payday, your employer sends the withheld tax to the ATO. Tax on business and investment income is not collected the same way. Without PAYG Instalments, someone with substantial business or investment income would owe an entire year's tax at the point of lodging their return, several months after the income year has ended.

PAYG Instalments smooth that cash flow. The ATO estimates the tax you will owe on your business and investment income and asks you to pre-pay it across the year in four quarterly amounts. When you lodge your return, the instalments you have already paid are credited against your total tax liability. The difference is the amount refunded to you or still owed.

PAYG Instalments are not an additional tax. They are the same tax, collected earlier.

Who is entered into the system

The ATO enters an individual or trust into PAYG Instalments automatically when all three of the following are true, based on the most recently lodged tax return:

  • Business and investment income of $4,000 or more

  • Tax payable on the notice of assessment of $1,000 or more

  • Estimated tax for the current income year of $500 or more

Business and investment income includes distributions from trusts (including managed funds), franked and unfranked dividends, gross rental income, gross interest, and sole trader or partnership income. It does not include salary or wages — those are captured by PAYG Withholding.

Once you are in the system, you remain in it until a lodged return shows tax payable below the exit threshold and the ATO removes you.

When the instalments are due

Quarterly instalments follow the ATO's activity-statement cycle:

  • Quarter 1 (July to September) — due 28 October

  • Quarter 2 (October to December) — due 28 February the following year

  • Quarter 3 (January to March) — due 28 April

  • Quarter 4 (April to June) — due 28 July

The Q2 due date of 28 February — rather than 28 January — is a deliberate concession recognising the Christmas and holiday period.

Lodging electronically can extend these dates by a fortnight in most cases. Registered tax agents may have further extensions through the ATO's lodgement program.

The two calculation methods

The ATO offers two methods, and you elect which one to use.

Option 1 — Instalment amount. The ATO calculates a fixed dollar amount based on the tax paid on business and investment income in your last lodged return, adjusted by a GDP factor to account for economic growth. For the 2025–26 year, that GDP factor is 4%. Your quarterly instalment is a set figure; you pay the same amount each quarter regardless of what your business or investment income actually was in the period.

Option 2 — Instalment rate. The ATO gives you a rate expressed as a percentage. You apply that rate to your actual instalment income for the quarter and pay the resulting amount. Instalments therefore rise and fall with actual quarterly income.

Which method suits. Option 1 is administratively simpler — no calculation is needed each quarter, and the total for the year is predictable. It suits taxpayers whose income is stable or growing steadily. Option 2 more closely matches instalments to actual income, which suits taxpayers whose income is variable or seasonal. Companies with business and investment income above $2 million (and that are not small or medium business entities) are required to use Option 2.

The election for the year must be made by the due date of the first quarterly instalment — typically 28 October.

Varying an instalment

If your income has changed materially — up or down — you can vary the instalment amount or rate to reflect the change. Variations must be made on or before the instalment's due date.

The mechanic to be aware of: if you vary down and the total tax you actually owe for the year turns out to be more than 85% of the amount the ATO originally calculated, the ATO may apply the General Interest Charge (GIC) to the shortfall. GIC is a real cost. The 85% threshold gives room for genuine, honest estimates without penalty, but does not protect an overly optimistic downward variation.

Varying up carries no such penalty. If your income has clearly risen, paying more each quarter avoids a larger bill and any associated shortfall at year-end.

A worked example

Consider a sole trader whose 2024–25 tax return reported net business income of $80,000 and total tax payable of $16,000. The ATO enters her into PAYG Instalments for 2025–26 under Option 1. Her quarterly instalment is $4,160 — the base tax of $16,000 uplifted by the 4% GDP factor, divided across four quarters.

Through 2025–26, she pays four quarterly instalments totalling $16,640. She lodges her 2025–26 return in September 2026, showing total tax payable of $18,000 on the year's actual income. The $16,640 already paid is credited. She owes an additional $1,360 at lodgement — a manageable amount because the bulk was paid across the year.

Had she instead paid nothing during the year, the entire $18,000 would fall due at lodgement — the cash flow event the system is designed to prevent.

The principle

PAYG Instalments is a cash flow mechanism, not an additional tax. The tax owed is the same either way. What changes is when it leaves your account.

The disciplined approach is to hold the ATO's instalment schedule alongside your own cash flow expectations, review it after any material change in income, and act early to vary — up or down — where the change is genuine. The system rewards regular attention and quietly penalises neglect.

If you would like to review whether your PAYG Instalments are correctly set — or whether a variation is warranted — we welcome the conversation.

Corinne Kirk
Partner, Accountant

1300 102 542 | 0405 106 401
corinne@egu.au

Sources

This is general advice. It does not take account of your objectives, financial situation, or needs, and is not a substitute for advice that does. Before acting on anything in it, consider whether it suits your circumstances, and consider the relevant Product Disclosure Statement.

Corinne Kirk