A guide to income tax and PAYG Instalments for Australian business owners

Paying income tax is a part of life, regardless of whether you operate a business or are an individual earning a wage, business income or investment income.​

Managing your income tax isn’t always as simple as lodging a return once a year. Depending on income levels, you may also need to pay tax in advance rather than a lump sum payment at the end of the financial year.​

This guide explains everything you need to know about Pay As You Go Instalments (PAYGI), from who needs to pay it, to how to calculate the instalments, and what that means for your tax return lodgement.​

The amount of income tax you pay depends on your structure and taxable income:​

In all cases, income tax is based on net profit (income minus allowable expenses). This is reported each year in a tax return, and based on this, the ATO may require you to start paying tax in advance through PAYG Instalments.​

PAYG Instalments are prepaid amounts of income tax that you make to the ATO (usually quarterly) towards your expected tax liability for the year.​

After your annual tax return is lodged, the instalments are then credited towards the total amount of income tax owed. If you’ve overpaid, you’ll get a refund. If you’ve underpaid, you’ll pay the difference.​

It’s designed to help businesses (and individuals with income that hasn’t been taxed at the source) ease cashflow by prepaying smaller amounts throughout the year.​

PAYG Withholding (PAYGW) is where income tax is deducted at the source. For example, if you’re earning a salary/wage, the employer will deduct PAYGW and forward that tax to the ATO on your behalf.​

Some income sources don’t have PAYGW deducted, which is where PAYGI may apply.  For example, if you have rental properties and the net profit you make from those meets the qualifying criteria (outlined below), you’ll be required to enter the PAYGI regime.​

The ATO will usually notify you if you need to start paying PAYGI, based on your last lodged tax return.​

You’ll be required to enter the PAYGI regime if:​

Generally, this will apply to most companies, plus individuals who earn income from sources not covered by PAYG Withholding (e.g. business or investment income such as sole trader/partnership income, beneficiary income from a trust, or rental income).​

The ATO calculates a set dollar amount for each quarter based on the most recent tax return. This is the easiest method and often used by individuals or businesses with predictable income.​

Example:​

Tax bill for year ended 30 June 2025 = $46,000
The ATO will calculate the quarterly instalment based on $46,000 plus a growth factor equal to GDP.  This is currently 4%.  Therefore, the ATO will estimate that you will have an estimated $47,840 tax payable for 2026 and will request this is paid in quarterly instalments of $11,960.​

Please note, depending on when you lodge your return, the ATO may request a higher instalment for one quarter if the previous quarter has already passed.  For example, if you enter the PAYG Instalment system in November, the ATO may request you pay $23,920 for the December quarter and then $11,960 for the subsequent two quarters.  This is because you have missed the September quarter instalment.​

The ATO works out your instalment rate and you apply this percentage to your actual income for the period. This gives you more flexibility if your income fluctuates.​

Example:​

Tax bill for year ended 30 June 2025 = $46,000
Total instalment income for the year ended 30 June 2025 = $920,000 ​​

The instalment rate is 5%  [$46k divided by $920k].​

Instalment income for the quarter ending 30 September 2025 = $204,000
PAYGI payment is 5% of $204,000 = $10,200 ​​

Your BAS or Instalment Notice will show the method and amount or rate you’re expected to use. If you’re eligible to choose between the two methods, the ATO will give you both options.  ​

We recommend using the Instalment Rate Method if you run a business or have fluctuating income.  This way your payments are matched to your income levels.​

PAYGI is included in quarterly Business Activity Statements (BAS) for businesses registered for GST or PAYGW, or in quarterly Instalment Activity Statements (IAS) if you’re not registered for GST.​

Payments for PAYGI are made together with any other payments in the Activity Statement. The due date is dependent on your lodgement frequency and whether a tax agent is lodging on your behalf.​

For quarterly BAS/IAS lodgement via a tax agent the dates are as follows:​

If you file quarterly without a tax agent, the due dates are 28 April, 28 July, 28 October and 28 February.​

When your tax return is lodged, the instalments you’ve paid to the ATO during the year are credited against your total tax bill.​

Based on the assessment of your total tax liability, you’ll either receive a refund to your nominated bank account or get a Notice of Assessment requiring you to pay a remaining balance.​

Companies example:​

Total tax owed based on lodged tax return = $100,000​

PAYGI = $80,000​

Remaining balance to pay = $20,000​

Individual example:​

Total tax owed based on lodged tax return = $50,000​

PAYGW = $30,000​

PAYG = $10,000​

Remaining balance to pay = $10,000​

PAYG Instalments are a way of pre-paying income tax so you’re not hit with a giant bill at the end of the year. While it can feel like an annoying admin task, it’s designed to be helpful and avoid overwhelm following the end of the financial year when you lodge your return.​

If you’re unsure about your obligations or want help managing tax payments, it’s worth having a quick chat with your accountant.​

If you're not working with one or looking to change, book a call with us to discuss your business accounting requirements and explore how we can help.​