PAYG Instalments in Australia: Why the ATO Is Billing You

A few weeks after the 2025-26 return is assessed, a PAYG instalment notice turns up in myGov with a figure, a label and a due date, and the first reading is that the ATO has invented a new tax. What has happened is that the ATO has started collecting next year’s income tax in advance. PAYG instalments are prepayments of the tax on business and investment income that nobody withholds for you, and every dollar paid comes back as a credit when the next return is assessed. The instalment is not the expensive part. The variation is: cut an instalment because the quarter was quiet and land below 85% of what the year’s tax turns out to be, and the general interest charge runs on the shortfall at 11.51% a year, the ATO’s rate for October to December 2026, with no deduction for it since 1 July 2025. What follows is why you were entered, how the figure is worked out, the dates, varying, stopping, and what to do if a quarter can’t be paid.

What PAYG instalments are

The ATO’s own definition is one line: pay as you go instalments are prepayments of your expected income tax for the year. They apply to income nobody withholds tax from, which for most readers means sole trader profit, and for others rent, interest, dividends, a partnership share or a trust distribution.

The instalment changes when you pay, not what you pay. When you lodge your tax return, the instalments are credited against your income tax, any excess is refunded, and any shortfall is paid with the assessment. The credit is for every instalment payable for the year, including one not yet paid when the assessment issues. An instalment is not a deduction and does not reduce the tax itself.

The acronym is shared with a different system. PAYG withholding is what an employer takes out of wages before they are paid. PAYG instalments is what the ATO asks of people with no employer doing that. Someone whose income has only ever been wages never gets an instalment rate, which is written into the Act itself.

Why the ATO is billing you

Your latest return crossed the ATO’s three-part test, and all three parts have to be met. The ATO’s Starting PAYG instalments page sets them out: instalment income from your latest return of $4,000 or more, tax payable on your latest notice of assessment of $1,000 or more, and estimated notional tax of $500 or more. Instalment income is gross business and investment income, excluding GST and capital gains, so almost any trading year clears the first part, and it is the $1,000 of tax payable that usually decides it, as the sole trader tax rate guide works through at three profit levels. A company has its own test: instalment income of $2 million or more, or notional tax of $500 or more.

The ATO works from your latest assessment, which is why the timing feels sudden. A 2025-26 return lodged in August and assessed in September produces a first notice for the September quarter, due 28 October 2026. Entry is notified in your myGov inbox, or in Online services for business, 21 days before that due date, and the letter explaining why stays in your communication history. Most people then pay quarterly.

You can also enter voluntarily in your first year, through the tax registrations menu in myGov, which splits the one-hit first bill into quarters before the ATO does it for you.

How the ATO works out the amount

The ATO starts from the tax on your last assessment, which the Act calls your notional tax: the tax on the base year’s taxable income, reduced by the share of it that came from wages, since the employer is already withholding on those. It then increases the base figure by a percentage it sets at the start of each income year from GDP growth, and splits the result across the quarters you are liable for. The percentage changes every year, so take it from the notice rather than from anything published last year.

The split is the part no notice explains. Under the instalment rules in the Taxation Administration Act, the amount for each quarter is a cumulative share of the GDP-adjusted notional tax, counted from the first quarter you are liable for, not from the start of the financial year:

1. First quarter you are liable for25% of GDP-adjusted notional tax
2. Second50%, less the instalment already paid
3. Third75%, less the instalments already paid
4. Fourth100%, less the instalments already paid

Enter at the second quarter and the year collects 75% of the figure during the year, with the rest arriving at assessment. Enter at the fourth and it collects 25%. Lodging the return early or late therefore changes how much of next year’s tax arrives in instalments and how much lands in one go.

Amount or rate: which option to take

The activity statement or notice offers two ways to pay. Option 1, at label T7, is the amount the ATO has worked out as above, and it is the default for an individual. Option 2, at label T2, is an instalment rate: notional tax divided by last year’s instalment income, as a percentage, which you apply to each quarter’s actual business and investment income.

The amount suits steady profit, because it is fixed for the year and there is nothing to work out each quarter. The rate suits income that swings or is falling, because a quiet quarter produces a smaller instalment without a variation. Once you choose, the option applies for the rest of the income year.

When PAYG instalments are due

Quarterly instalments are due 28 days after the end of each quarter, on the same days as a quarterly BAS. The dates sit on the small business tax calendar beside everything else that falls due, and the BAS due dates guide carries the conditions on each concession.

Quarter	Instalment due	Note
July to September 2026	28 October 2026	The first quarter for anyone entered after an August or September assessment
October to December 2026	28 February 2027, moved to Tuesday 2 March 2027	28 February is a Sunday and Monday 1 March is WA Labour Day, so the ATO’s next business day applies
January to March 2027	28 April 2027	28 days after the quarter
April to June 2027	28 July 2027	The last instalment for 2026-27

Some pages give the 21st rather than the 28th. The Act’s own date for a quarterly instalment is the 21st of the month after the quarter, and the 28th, with 28 February for the December quarter, is the date for a deferred BAS payer, which is the date the ATO’s own 28-day line reflects. The date on your notice is the one that applies.

If you pay the ATO’s amount quarterly and have nothing else to report, you get an instalment notice rather than a BAS. The ATO’s instalment notices page sets out the three conditions: you report and pay quarterly, you pay the amount the ATO advises, and you have no other reporting obligations. The notice shows the amount at T7, nothing is sent back with the payment, and paper notices stop once you lodge electronically. The online lodger’s two-week concession on a quarterly BAS does not apply to an instalment notice, so the date printed on it is the date.

A business that is not registered for GST and does not need to be, is not in a GST-registered partnership, and has notional tax under $8,000 can choose to pay one annual instalment instead, due 21 October. The option lapses once notional tax reaches $8,000.

Varying your instalments

You vary on the activity statement or instalment notice, on or before the due date and before the return for the year is lodged. The ATO’s page on varying says it plainly: you don’t have to vary your PAYG instalments at all, and varying will not change how much income tax you pay for the year. The next assessment refunds whatever was paid over the final figure.

The limit is the 85% line. If your varied instalments come to less than 85% of your total tax payable for the year, the ATO may charge the general interest charge on the difference, on top of the shortfall itself. The ATO’s GIC rates table puts the rate at 11.51% a year for October to December 2026, and GIC incurred since 1 July 2025 is not deductible. A varied rate applies for the rest of the year unless you vary it again, and the ATO has the power to remit the charge.

A variation is a forecast of the whole year’s tax, which is why the guesswork costs money. Half an hour of tax advice at $75 is the sanity check: the question is what the year’s taxable profit will be, and the answer sets the figure to vary to.

What happens at tax time

The assessment credits every instalment payable for the year, whether paid or not, against the tax it works out, then refunds the excess or bills the shortfall. The new assessment also becomes the base for the following year, so the rate and the amount reset with each return.

A year varied down ends with a bigger assessment bill. A year left at the ATO’s amount in a falling business ends with a refund. Neither changes the tax, only when it is paid, as Sam’s two lodgement dates show.

Can you stop PAYG instalments?

You are liable for an instalment only while the ATO has given you an instalment rate and has not withdrawn it. The ATO withdraws the rate when a later return no longer meets the entry test, and you can ask to leave through the tax registrations menu in myGov once your business or investment income has fallen away. A final return ends it.

While you are still in the system, varying is the tool, not ignoring the notice. An unpaid instalment is an ATO debt with the general interest charge running from the day after it was due, and it is still credited at assessment whether or not it was paid on time.

If you can’t pay an instalment

An instalment is an ATO debt like any other, so a payment plan is available for it, and the instalment is still credited at assessment. The ATO payment plan guide covers the mechanics. For a business with turnover under $2 million, an overdue activity statement amount of $50,000 or less that has been overdue for up to 12 months can go on the ATO’s interest-free plan, paid by direct debit within 12 months, with the general interest charge remitted while the plan is kept.

Where ReturnTax fits

A first notice usually raises two questions: is the figure right, and should it be varied. A 30-minute session at $75 answers both. Where ReturnTax lodges your BAS, the variation goes on the statement at $250, and the sole trader return that sets next year’s instalments is $330 with the personal return included, $440 registered for GST.