What Is PAYG Instalment Income Explained?

Pay As You Go (PAYG) instalments represent a system used by the Australian Taxation Office (ATO) to facilitate the prepayment of income tax throughout the financial year. This system helps individuals and businesses manage their tax obligations by spreading payments across the year. Its primary purpose is to prevent taxpayers from facing a single, large tax bill at the end of the financial year. PAYG instalments apply to income that does not have tax withheld at the source, unlike salary and wages where tax is typically deducted by an employer. This proactive approach supports better cash flow management for taxpayers, allowing for consistent financial planning.

Who Pays PAYG Instalments

Individuals and businesses earning income without tax withheld at the source are typically required to pay PAYG instalments. This often includes income from business activities, investments, or rental properties. The Australian Taxation Office (ATO) determines eligibility based on information reported in a taxpayer’s most recent tax return.

For individuals and sole traders, automatic entry into the PAYG instalment system usually occurs if their latest tax return shows business or investment income of $4,000 or more, with an assessed tax payable of $1,000 or more, and an estimated tax of $500 or more. The ATO will notify eligible taxpayers when they need to start paying PAYG instalments, usually through a letter or via their myGov account. While automatic entry is common, some individuals or businesses may choose to voluntarily enter the system to proactively manage their tax obligations, especially if they anticipate significant profits.

Income Subject to Instalments

Income subject to PAYG instalments includes earnings where tax is not automatically deducted. This system targets business and investment income. The purpose is to ensure that tax is paid progressively throughout the financial year.

Income subject to PAYG instalments includes:
Business and professional income earned by sole traders, partnerships, trusts, and companies, including revenue from trading, services, or sales.
Rental income from investment properties.
Investment income, such as interest from savings accounts or term deposits, and dividends from shares.
Managed fund distributions.
Capital gains from the sale of assets like property or shares.
Foreign income.

Calculating Your Instalments

The Australian Taxation Office (ATO) calculates PAYG instalments using information from your most recently lodged tax return. This aligns estimated tax payments with your historical earning patterns. The ATO adjusts this amount to reflect likely income growth, often based on GDP changes.

Taxpayers are provided with two methods for calculating their instalments: an instalment amount or an instalment rate. The instalment amount is a fixed sum calculated by the ATO. Alternatively, the instalment rate is a percentage provided by the ATO that taxpayers apply to their actual income for each period. The ATO sends instalment notices or statements to taxpayers, outlining the calculated amounts or rates and their due dates.

If a taxpayer’s financial situation changes significantly during the year, they can vary their PAYG instalments. This involves submitting an updated income estimate to the ATO, which can adjust future instalment amounts. Accurate estimates are important when varying instalments, as underpayments can lead to general interest charges or penalties.

Paying Your Instalments

Once your PAYG instalment amount or rate is determined, payments can be made using various options. The Australian Taxation Office (ATO) provides payment details directly on the instalment notice or through online services. This includes unique payment reference numbers and BPAY biller codes for ensuring payments are correctly attributed.

Electronic payment methods include BPAY, direct debit, or credit/debit card payments made via the ATO’s online services. Some taxpayers may also have the option to pay at Australia Post outlets using Post Billpay. PAYG instalments are typically due quarterly, generally 28 days after the end of each quarter (e.g., October 28, February 28, April 28, and July 28).

For businesses registered for Goods and Services Tax (GST), PAYG instalments are reported and paid as part of their Business Activity Statement (BAS). If a taxpayer is unable to meet a payment deadline, contact the ATO to discuss payment arrangements, which can help avoid penalties.