Understanding PAYG Instalments

Pay As You Go (PAYG) Instalments is a system for paying instalments during the income year towards an entity’s or individual’s expected tax liability on business and investment income. The actual tax liability is determined at the end of the income year when the annual income tax return is assessed. PAYG instalments paid throughout the year are credited against the assessment to ascertain whether the entity or individual owes more tax or is entitled to a refund.  

The Australian Taxation Office (ATO) will reach out to entities and individuals required to pay PAYG instalments, notifying them of their instalment rate. This rate is calculated based on the information from the last assessed income tax return. PAYG instalments may be included as part of an activity statement, or a separate instalment notice may be issued.  

The instalment is calculated by multiplying the instalment rate by business and investment income for the instalment period. The primary advantage of this method is that instalments are based on income as the entity or individual earns it, rather than a projection of the previous tax situation. However, some entities, and all individuals, may opt to pay an instalment amount calculated by the ATO, which is based on the most recent tax assessment plus an uplift factor (this is the default method for all individuals, certain trustees, and specific other entities). This decision must be made before the due date for the first instalment payment for each income year and will apply for the remainder of that year.  

Entities and individuals can vary an instalment if they believe the instalment rate or the ATO-calculated instalment will lead to paying more or less than their expected tax liability for the year.  

Instalments are generally payable quarterly, but some entities may be able to pay annually, while certain large taxpayers are required to pay monthly.  

Individuals  

PAYG instalments for individuals are typically paid quarterly. If the most recent annual tax liability on business and investment income is less than $8,000 and certain other conditions are met, individuals can opt to pay a yearly instalment. For more details, see Annual PAYG instalments. A special two-instalment option is available for some primary producers and certain professionals (e.g., sportspersons, artists, inventors, and authors).  

Partnerships and trusts  

Partnerships and most trusts are generally not mandated to pay PAYG instalments. However, special rules apply to partners and beneficiaries when they calculate their own PAYG instalments.  

Companies  

PAYG instalments for companies are usually paid quarterly. Companies can choose to pay an annual instalment if they meet the criteria for individuals, along with additional conditions. Companies will be required to pay monthly if their income exceeds $100 million ($20 million if they are the head company in a consolidated group or required to remit GST monthly). Companies can pay the amount notified by the ATO if their income is less than $2 million, they qualify as a small business entity (or would qualify if the turnover limit was $10 million up to 1 July 2021 or $50 million thereafter), or they could pay an annual instalment but chose not to.  

Superannuation funds  

PAYG instalments for superannuation funds are generally paid quarterly. Superannuation funds can opt to pay an annual instalment if they meet the criteria for individuals noted above. Superannuation funds will be required to pay monthly if their income exceeds $100 million ($20 million if they are required to remit GST monthly). Superannuation funds can pay the amount notified by the ATO if their income is less than $2 million, or they could pay an annual instalment but chose not to.  

Common Mistakes to Avoid  

1. Ignoring ATO Notifications  

If you’re enrolled in PAYG instalments, you must lodge and pay, even if your income decreases. Failing to address statements can lead to compliance action and interest charges.  

2. Underestimating Variations  

Some taxpayers, in an attempt to enhance short-term cash flow, underestimate their income and vary their instalments too low. This can result in penalties and a significant tax shortfall when the annual return is lodged.  

3. Overpaying Without Adjusting  

If business has slowed, you may be overpaying in taxes. Avoid the 'set and forget' mentality; vary your instalment amount or rate to keep payments aligned with your actual income.  

4. Missing Lodgement Deadlines  

Even if you’re not due to pay (e.g., nil income that quarter), you still need to lodge your activity statement on time. Late lodgement can trigger penalties.  

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