PAYG instalments
Prepayments of tax on income that has nothing withheld, usually paid quarterly by investors and the self-employed.
If you earn significant income without tax withheld — business profits, rent, dividends or interest — the ATO will usually enter you into the PAYG instalments system so the tax arrives progressively rather than in one lump.
The ATO calculates an instalment amount or rate based on your last lodged return. You pay it quarterly, and the total is credited against your final tax liability when you lodge.
You can vary an instalment down if your circumstances have changed and the ATO's estimate is too high. Vary it too aggressively, however, and general interest charges can apply to the shortfall.
Entering the system after a good year
A sole trader owes $9,000 at lodgment. The ATO then issues quarterly instalments of roughly $2,250 for the following year, so the next bill is largely prepaid.
The bit people get wrong
The year you enter the instalments system can feel brutal: you settle last year's tax bill and start prepaying this year's at the same time. It is a timing shift rather than extra tax, but it needs planning.
Common questions
How do I get out of PAYG instalments?
You can exit if your investment or business income falls below the entry thresholds. The ATO reviews this annually, and you can also contact them if circumstances have changed materially.
Are instalments extra tax?
No. Every instalment is credited against your final assessment, so it only changes when you pay rather than how much.
Can I vary my instalment if business slows down?
Yes, you can vary an instalment when the ATO's estimate no longer matches your circumstances. Vary it too low and interest can be charged on the shortfall, so base the revision on real figures.