PAYG, or Pay As You Go, is the Australian Taxation Office’s method of collecting income tax in stages throughout the financial year instead of in one lump at the end. It has two branches. PAYG withholding is the tax your employer takes out of your wages before paying you. PAYG instalments are prepayments the ATO requires from people and businesses earning income that doesn’t flow through a payroll, such as sole trader earnings, rent, or investment returns. Both sit within Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 and replaced the old provisional tax system that used to leave taxpayers with large year-end bills.
How PAYG Withholding Works
Every time an employer pays wages, salary, bonuses, or commissions, they must hold back a portion for tax and send it to the ATO. The worker receives the net amount, and the withheld tax is credited against their annual liability when they lodge a return. The same obligation covers directors’ fees and certain termination payments.1Australian Taxation Office. Payments You Need to Withhold From
How much comes out depends on what the worker tells the employer through their Tax File Number declaration (form NAT 3092), which records residency status and whether the tax-free threshold is being claimed. Wrong details on that form lead to over- or under-withholding that only gets fixed at tax time.2Australian Taxation Office. Tax File Number Declaration
A separate rule catches contractors and suppliers. If someone invoices a business without quoting an Australian Business Number, the payer must withhold 47 percent of the payment, a rate that combines the top marginal bracket with the Medicare levy and has stood since 1 July 2017.3Australian Taxation Office. Statement by Supplier Not Quoting an ABN The supplier can avoid this by completing a Statement by a Supplier where an exemption applies, for example if the payment is $75 or less excluding GST, if the supplier is under 18 and paid no more than $350 a week, or if the transaction is a private hobby or domestic sale.
Employers report the wages and withholding data through Single Touch Payroll each pay run, sending it directly to the ATO from their payroll software. STP has been compulsory for all Australian employers since 1 July 2021, regardless of headcount, and has largely replaced the old annual PAYG withholding report.4Australian Taxation Office. STP Phase 2 Reporting Quick Reference Guide
How PAYG Instalments Work
Business income, rental income, dividends, and other investment returns usually don’t pass through a payroll, so no one is withholding tax on your behalf. PAYG instalments fill that gap by having you prepay the estimated tax on that income in periodic amounts, most often quarterly, sometimes annually or monthly.
You don’t apply. The ATO enrols you automatically once your latest tax return crosses the thresholds. For individuals, sole traders, and trusts, all three of the following must apply:5Australian Taxation Office. Starting PAYG Instalments
- Gross business and investment income of $4,000 or more (excluding GST and capital gains)
- Tax payable of $1,000 or more on your latest notice of assessment
- Notional tax of $500 or more on that instalment income
Companies and super funds enter if any one of the following applies: instalment income of $2 million or more, notional tax of $500 or more, or being the head company of a consolidated group.
Once you’re in, the ATO tells you which of two calculation methods to use. The instalment amount method sets a fixed dollar figure each quarter based on your last return. The instalment rate method applies a percentage to your actual quarterly income, so the payment moves with your earnings. Your activity statement carries the figure you need.6Australian Taxation Office. PAYG Instalments
Varying an Instalment
If your income has shifted noticeably since your last return, you can vary the instalment down (or up) on your activity statement and pick a reason code, such as change in investments (21), business ceasing (22), or unusual trading conditions (23).7Australian Taxation Office. How to Vary Your PAYG Instalments
Under-varying is where people get hurt. If your varied instalments for the year come in below 85 percent of the tax you actually owe, the ATO applies the General Interest Charge on the shortfall, backdated to when each payment was originally due. The GIC rate for the April–June 2026 quarter is 10.96 percent per annum.8Australian Taxation Office. General Interest Charge (GIC) Rates
When PAYG Amounts Are Due
Most businesses and investors report and pay PAYG through the quarterly Business Activity Statement. The dates repeat every year:9Australian Taxation Office. Due Dates for Lodging and Paying Your BAS
- Quarter 1 (Jul–Sep): 28 October
- Quarter 2 (Oct–Dec): 28 February
- Quarter 3 (Jan–Mar): 28 April
- Quarter 4 (Apr–Jun): 28 July
Lodging your quarterly BAS online adds two weeks to every quarter except Q2, which already has an extension built into the February date. Monthly reporters lodge and pay by the 21st of the following month. Any due date landing on a weekend or public holiday rolls to the next business day.
Annual instalment payers work to different dates. Self-preparers lodge by 31 October. Anyone using a tax agent must pay the annual instalment by 21 October, before the agent files the return.10Australian Taxation Office. When Are PAYG Instalments Due
Lodging and Paying
Individuals and sole traders lodge through myGov; businesses use the ATO’s Online Services for Business. Both let you enter figures and submit the BAS or instalment activity statement electronically.11Australian Taxation Office. Business Activity Statements (BAS)
Payment can be made by electronic funds transfer, direct debit, or the ATO’s Government EasyPay service, which accepts Visa, Mastercard, and American Express. Card payments can take up to four business days to reach the ATO, and a new direct debit from a savings or cheque account needs at least seven working days to activate on top of processing time, so leave a buffer before the due date.12Australian Taxation Office. Other Payment Options Paper forms are still accepted by post.
When you lodge your annual return, the ATO reconciles your periodic payments against your actual tax. Overpaid, and you get a refund. Underpaid, and you owe a balancing payment.
Penalties for Getting It Wrong
The penalty for failing to withhold matches the amount that should have been withheld. Miss $5,000 of withholding on a contractor payment and the penalty is $5,000.13Australian Taxation Office. Failure to Withhold A private agreement between payer and payee to skip withholding doesn’t override the obligation; the legal responsibility stays with the payer.
Company directors carry personal exposure through the Director Penalty Notice regime. If a company doesn’t pay its PAYG withholding by the due date, the director becomes personally liable. The ATO issues a DPN giving 21 days to pay in full or arrange a payment plan. If the withholding liability was reported to the ATO within three months of its due date, the director can also discharge the penalty by placing the company into administration or liquidation. Miss that three-month reporting window and paying the debt outright is the only exit.14Australian Taxation Office. Director Penalties
New directors have a 30-day grace period from their appointment date to deal with any pre-existing withholding debts. Resigning inside that window doesn’t clear the liability unless the company itself takes one of the required actions within the 30 days.
Leaving the Instalment System
If your business or investment income dries up, you can withdraw yourself. The ATO will also remove you automatically if your instalment income falls below $4,000 (for residents), your tax payable falls below $1,000, your notional tax drops under $500, or your instalment rate calculates to zero.15Australian Taxation Office. Stopping PAYG Instalments You can’t exit while in bankruptcy, a debt agreement, or a personal insolvency agreement. If your income climbs back over the thresholds in a later year, the ATO re-enters you automatically based on that year’s return.