What Are PAYG Instalments? A Guide for Small Business Owners and Investors

If you earn income from a business or investments, the ATO might ask you to start making PAYG instalments. But what does that mean, and how is it different from PAYG withholding?

At Rod Accounting & Financial Services in Geelong, we often explain PAYG instalments to clients who are new to business or investment income. In this article, we’ll break down the concept in simple terms and help you understand how to stay on top of your tax obligations without hurting your cash flow.

What Are PAYG Instalments?

PAYG (Pay As You Go) instalments are pre-payments of income tax made throughout the year. These instalments are based on your business or investment income, and they help you avoid a large tax bill when you lodge your tax return.

Think of it as a way to spread your tax payments evenly across the year, rather than paying one big lump sum at the end.

Unlike PAYG withholding, where tax is withheld from employee wages, PAYG instalments apply to income you earn as a business owner, sole trader, investor, company, or trust.

How PAYG Instalments Work

Here’s how the system works:

1. The ATO either automatically enters you into the PAYG instalment system (based on your previous tax return) or you can voluntarily opt in.
   
2. You start making quarterly payments (instalments) towards your expected tax bill.
   
3. When you lodge your annual tax return, those payments are applied to your total tax payable.
   
4. If you’ve paid too much, you may get a refund. If you’ve underpaid, you’ll just pay the difference.
   

This system helps you stay ahead of your tax, maintain better cash flow, and avoid a surprise bill at tax time.

Who Needs to Pay PAYG Instalments?

The ATO determines whether you need to pay PAYG instalments based on your most recent tax return. They look at your instalment income, which is your gross business and investment income, excluding GST and capital gains.

Entry thresholds differ depending on your entity type:

Individuals and Sole Traders

You will automatically enter the PAYG instalment system if you meet all of the following:

• Instalment income of $4,000 or more
  
• Tax payable on your latest notice of assessment is $1,000 or more
  
• Estimated (notional) tax is $500 or more
  

Companies and Super Funds

You’ll be required to pay PAYG instalments if:

• Instalment income is $2 million or more
  
• Notional tax is $500 or more
  
• You’re the head company of a consolidated group
  

For more details on thresholds, visit the ATO’s official page on starting PAYG instalments.

How Do You Start Paying PAYG Instalments?

If you’re required to pay PAYG instalments, the ATO will notify you directly. Depending on how you manage your tax affairs, you may receive:

• A letter in your myGov inbox
  
• A notification through your Online Services for Business
  
• A paper letter in the mail
  
• An SMS reminder if your mobile number is on file
  

The ATO will also let you know:

• When to pay
  
• How often to pay (usually quarterly)
  
• How much to pay, with different calculation options
  

You’ll begin paying once you receive an activity statement or instalment notice.