PAYG Instalments
Regular prepayments of tax on business or investment income that doesn't have tax withheld at source.
PAYG instalments are regular prepayments of income tax that the ATO requires from individuals, companies, and other entities that earn business or investment income that doesn't have tax withheld at source. If your instalment income (business and investment income) exceeds certain thresholds, the ATO will automatically enter you into the PAYG instalment system.
You typically enter the PAYG instalment system when your most recent tax assessment shows instalment income above approximately $4,000 and your assessed tax liability is above $1,000 (after accounting for PAYG withholding credits). Instalments are usually paid quarterly, aligned with BAS due dates. You can choose between the instalment amount method (ATO calculates a set amount per quarter) or the instalment rate method (you multiply your actual income by a rate the ATO provides).
PAYG instalments are not an additional tax — they are advance payments towards your annual income tax liability. When you lodge your tax return, all PAYG instalments and PAYG withholding paid during the year are credited against your total tax liability. If you've overpaid, you receive a refund. If your income has decreased significantly, you can vary your instalments downward, but be aware that penalties may apply if you vary too aggressively.
How it works
PAYG instalments are regular prepayments toward your income tax bill, aimed at income that doesn't already have tax withheld at the source — typically business or investment income like rent, dividends, or freelance earnings. Unlike PAYG withholding, which an employer manages on your behalf, PAYG instalments are your own responsibility to calculate and pay, usually on a quarterly cycle aligned with BAS due dates.
You're automatically brought into the system once your most recent tax assessment shows instalment income, broadly your business and investment income, above roughly $4,000 and an assessed tax liability above roughly $1,000, after PAYG withholding credits are taken into account. From there, the ATO gives you a choice between the instalment amount method, where it sets a fixed dollar figure each quarter, or the instalment rate method, where you apply a percentage rate the ATO calculates to your actual income each period.
The instalments are not an extra tax on top of your normal liability — they're simply advance payments that get credited against your final assessment when you lodge your return, the same way PAYG withholding is. People sometimes panic at an unexpected instalment notice, but it usually just means the ATO noticed a new or growing income stream, like a rental property, that isn't covered by any employer's withholding. You can vary your instalments down if your income has genuinely fallen, though the ATO can apply penalties if you vary too aggressively without a reasonable basis.
Example: entering the PAYG instalment system
An investor with a rental property and some dividend income has instalment income of $4,500 for the year — above the roughly $4,000 threshold — and their most recent assessment shows a tax liability of $1,800 after withholding credits, above the roughly $1,000 threshold. Both conditions being met is what brings them into the PAYG instalment system.
The ATO sets their quarterly instalment amount by dividing the assessed liability across four quarters: $1,800 divided by 4 equals $450 per quarter. Each quarter, the investor pays that $450 alongside their BAS, and the running total is credited against their actual tax bill when they lodge their return for the year.
Related Terms
PAYG Withholding
The system where employers withhold income tax from employees' wages and remit it to the ATO throughout the year.
Business Activity Statement (BAS)
A form lodged with the ATO to report and pay GST, PAYG withholding, PAYG instalments, and other business tax obligations.
Income Tax
Tax levied by the federal government on your taxable income, calculated using progressive tax brackets.
Activity Statement
A form used by businesses to report and pay GST, PAYG withholding, PAYG instalments, and other tax obligations.
Sole Trader
An individual who runs a business in their own name, reporting business income and expenses in their personal tax return.