Who pays them
The ATO looks at your latest tax return. Your instalment income, the ATO says, “is your gross business and investment income, excluding GST and any capital gains.” PAYG instalments are a different thing from PAYG withholding, the tax an employer takes out of wages.
| Who | Entered automatically when |
|---|---|
| Individuals (including sole traders) and trusts | All three apply: instalment income of $4,000 or more on the latest return, tax payable of $1,000 or more on the latest notice of assessment, and estimated (notional) tax of $500 or more. |
| Companies and super funds | Any one applies: instalment income of $2 million or more, estimated (notional) tax of $500 or more, or being the head company of a consolidated group. |
You can also enter voluntarily, for example when you are new to business. The ATO says prepaying this way can smooth out cash flow and avoid a large bill at tax time. The ATO lets you know by letter (in your myGov inbox if it is linked) when you have been entered, with when to pay, how often and how much.
When each instalment is due
Most people pay quarterly. For a standard income year, the ATO lists these due dates.
| Quarter | Period | Due date |
|---|---|---|
| Quarter 1 | July–September | 28 October |
| Quarter 2 | October–December | 28 February |
| Quarter 3 | January–March | 28 April |
| Quarter 4 | April–June | 28 July |
The ATO adds some variations to that pattern:
- If you lodge your activity statement online, you may be able to lodge and pay 2 weeks later than the usual dates.
- Primary producers and “special professionals” such as authors, inventors, performing artists and sportspeople may be offered 2 instalments a year: 75% of the year’s total by 28 April and the rest by 28 July.
- Some people may pay once a year. Eligibility includes having most recent estimated (notional) tax under $8,000, and conditions about GST registration.
- Businesses with instalment income of more than $20 million pay monthly, due by the 21st of the following month.
Amount or rate: the two ways to work it out
Option 1: instalment amount
The ATO calculates the amount from your latest tax return. You pay what is shown on your activity statement or instalment notice and don’t need to calculate anything.
Option 2: instalment rate
The ATO gives you a percentage. You multiply your instalment income for the period by that rate. The ATO says this suits income that changes a lot, because payments rise and fall with it.
If you are eligible for both, both appear on the statement, and the one you choose applies for the rest of the financial year. Either way the ATO says the total tax for the year doesn’t change: instalments are credited against it, any excess is refunded and any shortfall is paid.
Varying your instalments
If your instalments look set to add up to more or less than your expected tax, you can vary them. You don’t have to: the ATO notes that varying doesn’t change the tax you pay for the year. A variation is made on the activity statement or instalment notice, on or before the day the instalment is due, and before you lodge that year’s return.
How the quarterly amounts are worked out
For a varied instalment amount, the ATO’s method is that by the end of each quarter you should have paid a set share of your estimated tax for the year: 25% after the first, 50% after the second, 75% after the third and 100% after the fourth, each time minus what you have already paid. (Credits claimed in earlier quarters are added back; the ATO page sets this out in full.)
Say someone paid $1,500 in each of the first two quarters, then at the third quarter estimates their tax for the year at $8,000. Under the ATO’s method the third instalment would be 75% of $8,000 ($6,000) minus the $3,000 already paid, which is $3,000. The fourth would be $8,000 minus $6,000 paid, which is $2,000. These figures are invented to show the arithmetic only.
The 85% line
The ATO warns against underestimating. If varied instalments come to less than 85% of the total tax payable on instalment income, the general interest charge may apply to the difference, and there may be penalties too. Its own advice is that if you’re not sure, it is best not to vary, because any overpayment is refunded after you lodge. The ATO’s PAYG instalments calculator can estimate the year’s tax and a varied amount.
When instalments stop
For individuals, the ATO lists cases in which it removes you automatically, including business and investment income under $4,000 (for residents), a tax debt under $1,000 on assessment, an instalment rate of 0.0%, or estimated (notional) tax under $500. You can also ask to leave if you no longer earn business or investment income, through myGov or a registered tax agent. Lodge a return above the thresholds later and the ATO will be in touch about re-entering.
PAYG instalments are a plan you are put on before a debt exists. In its section on floods and other disasters, the ATO’s variation page says that if you can’t pay your instalment you should still lodge the notice and discuss a payment arrangement; its payment plans for a tax debt are covered in a separate guide.