PAYG instalments: how the ATO sets them and when they are due

What a PAYG instalment is (and how it differs from PAYG withholding)

PAYG instalments cover tax on income nobody withholds tax from: sole trader profits, rent, interest, dividends and trust or partnership distributions. PAYG withholding is the other half of the system, where an employer deducts tax from wages before you are paid. If you are a salaried employee with a side business or rental property, you can be in both systems at once.

Paying instalments does not change how much tax you pay for the year. It changes when you pay it, so you avoid one large bill after you lodge.

When the ATO enters you into PAYG instalments

The ATO looks at your latest tax return. According to the ATO, an individual (including a sole trader) or trust is automatically entered when all three of these apply:

• Instalment income in your latest return of $4,000 or more.
• Tax payable on your latest notice of assessment of $1,000 or more.
• Estimated (notional) tax of $500 or more.
• Companies and super funds are entered if instalment income is $2 million or more, notional tax is $500 or more, or they are the head company of a consolidated group.

What counts as instalment income

Instalment income is your gross business and investment income for the period, excluding GST. Do not subtract deductions. It includes gross sales and fees, gross rent, interest, dividends (without franking credits), royalties, your share of partnership or trust income, foreign income, and fuel tax credits.

It excludes salary and wages that had tax withheld, franking credits, capital gains (except for super funds), and exempt income such as Family Tax Benefit. Wages are included only if tax was withheld because you did not quote your TFN or ABN.

How the ATO sets your PAYG instalment amount or rate

If you are eligible, your activity statement offers two options and you pick one on your first statement of the year. Option 1 is the instalment amount: a fixed dollar figure the ATO works out from your latest return, uplifted by a GDP adjustment. The ATO says the GDP adjustment is 5% for 2026–27 (it was 4% for 2025–26). It applies only if you pay quarterly or twice-yearly using the amount; it does not affect you if you use the rate or pay annually.

Option 2 is the instalment rate: you multiply your instalment income for the quarter (label T1) by the rate the ATO gives you (T2) and pay the result at 5A. The ATO calculates the rate as notional tax divided by instalment income, times 100. Because the payment follows your actual income, the rate suits seasonal or irregular businesses.

Worked example: a sole trader's latest return shows $120,000 of gross business income and $30,000 of deductions, so taxable income is $90,000. At 2026–27 rates, tax including the Medicare levy on $90,000 is about $19,320, which gives an instalment rate of roughly 16.1%. In a quarter with $27,000 of instalment income, the payment would be about $4,347. (The ATO's own notional tax calculation adjusts for things like offsets and losses, so your figure will differ slightly.)

If a calculated rate is unreasonably high, for example because your last return included a study loan repayment or an employee share scheme amount, the ATO caps it at a reasonable rate: 55% for individuals and trusts, 45% for super funds and 30% for corporate tax entities.

PAYG instalment due dates

Most people pay quarterly. If you use Online services for business or Standard Business Reporting software, the ATO says your instalment information arrives 21 days before the due date. If you lodge an activity statement online you may get an extra 2 weeks, except if you pay GST monthly. If you receive an instalment notice and pay the amount shown, you don’t need to lodge it.

Two instalments, annual and monthly options

Not everyone pays four instalments a year. The ATO offers other cycles to specific groups:

• Two instalments: primary producers and special professionals (authors, inventors, performing artists, production associates and sportspeople) who pay by the instalment amount pay 75% of the year’s instalments by 28 April and the rest by 28 July.
• Annual instalment: available if your most recent notional tax was under $8,000, you are not required to be registered for GST (or you are voluntarily registered and report GST annually), and you elect it before lodging your first quarter. If you lodge your own return you simply lodge by 31 October; if you use a tax agent you pay the annual instalment by 21 October.
• Monthly: businesses with instalment income over $20 million lodge and pay by the 21st of the following month.

How to vary your PAYG instalments without paying interest

You can vary an instalment if you expect your instalments for the year to be more or less than your actual tax, for example after selling shares, losing a major client or buying expensive equipment. You vary on the activity statement or instalment notice, on or before its due date and before you lodge your tax return, and you must enter a reason code at T4 (such as 21 for a change in investments or 23 for a significant change in trading conditions).

The risk is underestimating. If your varied instalments come to less than 85% of the tax actually payable on your instalment income, the ATO may charge the general interest charge on the difference, and possibly penalties. If you are unsure, the ATO’s own advice is not to vary, because overpaid instalments are refunded after you lodge.

Worked example of varying the amount (option 1): you paid $5,500 in each of the first two quarters, then estimate your tax for the year at $16,000. By the third quarter you should have paid 75% of the estimate, $12,000, so your third instalment is $1,000. In the fourth quarter you pay 100% less everything paid: $4,000. Enter the estimate at T8, the varied amount at T9 and 5A. If the result is negative you can claim a credit at 5B.

If you use the instalment rate (option 2), a rise or fall in sales is already reflected in the payment, so the ATO’s own example of varying the rate is a business whose profit margin has fallen. The varied rate is estimated tax divided by estimated instalment income, times 100, entered at T3.

Getting out of PAYG instalments

The ATO removes individuals automatically if their latest return shows business and investment income under $4,000, a tax debt under $1,000 after instalments, notional tax under $500, or an instalment rate of 0%, or if they become eligible for the seniors and pensioners tax offset. You can also ask to exit through myGov (Tax, Manage, Tax registrations, Cancel), but that option only appears once you are eligible to exit; a tax agent or the ATO on 13 28 61 can also help.

A practical tip for sole traders: move a fixed percentage of every payment you receive into a separate tax account, sized from your instalment rate plus GST collected. When the quarterly statement arrives, the money is already there.