top of page

PAYG Instalments what they are and how they are calculated

  • websites8439
  • Feb 10
  • 4 min read

PAYG Instalments help you prepay income tax on business and investment income across the year. Getting PAYG Instalments right supports cash flow, smooths your end of year bill and keeps you on side with the ATO. In this guide we explain what PAYG Instalments are, how they are calculated, when they are due and how to vary them so your payments reflect your current position.



What are PAYG Instalments


PAYG Instalments are regular prepayments of the expected tax on your business and investment income. The ATO notifies you when you enter the system and sets your lodgement cycle. Most taxpayers pay quarterly, while some may be eligible for twice yearly or annual payments. Larger taxpayers may pay monthly.



How PAYG Instalments are calculated


There are two main ways to work out what you pay each period.


  • Instalment amount method

The ATO provides a dollar amount on your activity statement. That figure is based on your most recent tax return and is adjusted each year by a GDP factor so the amount better reflects likely growth. You can accept the amount, or you can vary it if it is not aligned to your expected results. 


  • Instalment rate method

The ATO gives you an instalment rate. You multiply that rate by your instalment income for the period to calculate the amount to pay. If your income moves up or down, the payment changes with it. On your activity statement this is shown as T1 instalment income multiplied by T2 instalment rate. If you vary the rate you use T3 and choose a reason code at T4. 

More details on how the ATO calculates your PAYG instalment amount or rate are available here.


  • Which method should you choose

If your income is steady and predictable, the ATO amount can reduce admin. If your income is seasonal or changing, the rate method usually gives a closer match because it tracks actual instalment income.


ree



The current GDP adjustment factor


Most taxpayers pay quarterly with due dates that align with ATO activity statement cycles. If you are on monthly PAYG, payments are due on the twenty first day of the following month. Your ATO entry letter confirms your frequency and due dates and you can view these in Online services for business or myGov. 



How to vary PAYG Instalments safely


You can vary your instalment amount or rate when your expected tax for the year will be higher or lower than what the current settings would collect. Variations apply for the remaining instalments in the year and you can make another variation later if circumstances change. The ATO’s calculator can help you estimate the right amount and check credits from earlier instalments.


Which method should you choose

  • Estimate conservatively using up to date bookkeeping and realistic forecasts

  • Document assumptions and keep working papers in case the ATO reviews your estimate

  • Revisit your variation after major events such as a new contract, a price rise or a cost shock



Practical tips to manage cash flow


  • Reconcile monthly

Clean books mean reliable instalment income and smoother BAS preparation. That also helps if you choose the rate method.


  • Automate reminders

Our SMB’s services and ATO Online can help remind you to pay early enough for funds to clear before the due date.


  • Match method to your business

Seasonal or growth companies often prefer the rate method so instalments move with revenue. Stable businesses may prefer the ATO amount for simplicity.


  • Use tax planning to avoid shocks

Small changes in margins or structure can affect your instalment profile. If you are planning asset purchases, pricing changes or a restructure, build PAYG assumptions into your forecasts. See how we approach this on our SMB’s page. Contact us to align your PAYG strategy with cash flow and year end outcomes.




Frequently asked questions


Who has to pay PAYG Instalments

The ATO will place you into the system when your latest return shows business or investment income above entry thresholds. You will receive a notice via myGov, Online services for business or by mail. 


Can I switch methods during the year

You can usually choose your preferred method on the first activity statement of the income year. Method changes later in the year depend on your circumstances and ATO settings on your statement. 


What happens at tax time

Your PAYG Instalments are credited against your assessed income tax. If you have paid more than your final liability you receive a refund. If you have paid less you pay the difference and the ATO may apply interest if your variation was too low without a reasonable basis. 


Use tax planning to avoid shocks

Small changes in margins or structure can affect your instalment profile. If you are planning asset purchases, pricing changes or a restructure, build PAYG assumptions into your forecasts. See how we approach this on our Tax Planning page. 



Make PAYG instalments work for your cash flow with Sageon


Getting PAYG Instalments right is one of the simplest ways to protect cash flow and reduce end of year stress. Choose the calculation method that fits your business, check the current GDP factor, vary when needed and keep your books current.


If you want PAYG to run smoothly, schedule a consultation with our team today. Sageon builds PAYG settings into a broader tax planning approach so your instalments match your year end position and your growth plans. Start with Sageon SMB’s services and put a smart PAYG strategy in place.




 
 
bottom of page