Why Does the ATO Issue PAYG Instalments, and Do You Have to Pay Them?

I have received this question a lot lately, so I thought it would be useful to write an article to explain the Pay As You Go (PAYG) instalment system.

The Australian Taxation Office (ATO) uses the PAYG instalment system to help taxpayers manage their income tax obligations throughout the year. This system ensures that businesses and individuals do not face a large tax bill at the end of the financial year.

This will be issued to you quarterly by the ATO as it’s own PAYG Instalment Notice or if you are registered for GST and/or pay employees on your Business Activity Statement (BAS).

Why Does the ATO Issue PAYG Instalments?

The ATO issues PAYG instalments to taxpayers who earn income that is not subject to withholding tax, such as business or investment income. The purpose of these instalments is to collect tax in advance, reducing the financial burden of a lump sum tax payment at year-end.

The PAYG instalment system is designed to:

• Help taxpayers avoid large tax bills at the end of the financial year.

• Encourage better cash flow management for businesses and individuals.

Why Do You Have PAYG Instalments?

In most situations you are automatically enrolled in the PAYG Instalment system when you have lodged your prior year tax return, and it showed you owed money to the ATO.

Do You Have to Pay PAYG Instalments?

If the ATO notifies you that you are required to pay PAYG instalments, then yes, you must pay them unless you are eligible to vary or opt out. You will usually receive a letter or notification via your MyGov or ATO online account outlining your obligations.

Your PAYG instalments are calculated based on:

• A set rate applied to your business or investment income, or

• A fixed amount determined by the ATO based on your last tax return.

Can You Vary or Opt-Out of PAYG Instalments? 

Yes, you can vary your PAYG instalments if you believe the ATO’s estimate is too high. However, if you underestimate and end up owing more tax, you could be charged interest and penalties.

If your situation changes and you do not anticipate having a tax bill at the end of the year, you may be able to opt out altogether. When you amend a PAYG instalment to nil, it will usually stop future instalments being issued, but I would suggest checking in on a quarterly basis just to make sure.

I know in many situations you would prefer to earn interest or offset a mortgage with your tax funds, instead of paying instalments, but unfortunately you cannot do this by reducing or removing your instalments.

How Are PAYG Instalments Calculated?

Option 1: Instalment Amount

This is calculated by the ATO. While the calculation is more complex than this, a simplified explanation would be that if you have a $10,000 tax bill in the prior year the ATO would issue 4 quarterly instalments of $2,500 so if everything else is the same, your tax bill at the end of the year would be zero. Of course, things change so the system is never that perfect.

Option 2: Instalment Rate

This option can be more accurate for you if your business or investment income changes a lot, and you want to manage your cashflow. The amounts you pay will go up and down in line with your income.

You calculate the amount to pay by multiplying your instalment rate by your business and investment income. Your instalment rate is a percentage provided by the ATO on your PAYG Instalment Notice or Business Activity Statement (BAS).

What if I Pay Too Much or Not Enough in PAYG Instalments?

You can think of it like when they withhold taxes on your wages through the year. Any amount you pay will reduce any possible tax debts at year end or amounts in excess will be refunded to you as part of your tax return.

If you overpay significantly during the year and your situation changes, you can amend your current instalment to nil and refund all or part of the prior quarters too, if they are within the same financial year.

When Are PAYG Instalments Due?

The due dates for quarterly PAYG Instalments are as follows:

Quarter	Period	Due date
1	July–September	28 October
2	October–December	28 February
3	January–March	28 April
4	April–June	28 July

If you are paying your PAYG instalments as part of your BAS, the dates will instead be the same date as your BAS.

Managing/Paying PAYG Instalments

You can manage your PAYG obligations through the ATO online services, where you can:

• Check your instalment amounts.

• Vary your instalments if your income has changed.

• Make payments online.

Alternatively you can ask your tax agent for assistance.

With the ATO you will generally have (at least) two accounts, an Income Tax Account and an Activity Statement Account. It is important that your instalments are paid to your Activity Statement Account as the Income Tax Account is only used to manage your end of year tax return. While you would think the ATO could tell what your payment is for, they aren’t always that clever, so save yourself potential headaches by paying to the correct account.

What if I have Left Australia?

It is not unusual for me to see clients who have departed Australia in the prior financial year, but they have kept receiving PAYG Instalment Notices from the ATO. This can happen if you have not advised the ATO that the prior year was your final tax return, cancelled your ABN or sometimes it seems like the ATO just do it for fun.

I would suggest contacting a tax agent to assist you in varying your instalments before the end of the financial year, because once it is past you may have to lodge a tax return to remove your ATO debts.

If you have any further questions about the PAYG instalment system or would like assistance, please feel free to reach out.