Sole traders and ABN

What is a PAYG instalment notice and why did I get one?

A PAYG instalment notice asks you to prepay some of this year's income tax each quarter, because your last return showed business or investment income. It isn't a fine and it isn't extra tax. Every instalment you pay is credited against your tax when you lodge your return, and any excess is refunded.

The short version

  • Either way Tom's tax for the year is $7,000, and the option only changes how much he prepays along the way and whether he tops up $600 or gets $200 back.
  • In your records, instalments are tax paid in advance. They aren't a business expense and they don't reduce your profit.
  • If your varied instalments end up under 85% of your actual tax for the year, you may be charged general interest charge on the gap. The ATO's advice is that if you're not sure, it's best not to vary.

An envelope or myGov message arrives with “PAYG instalment” on it and a dollar amount due in a few weeks. You weren't expecting it, and you're not sure if it's a bill, a penalty or a mistake.

It's none of those. It's the ATO's way of spreading your tax across the year so you don't get hit with one big bill. Here's how it works and what your options are.

Why you got one

Employees have tax taken out of each pay. Business and investment income doesn't, so the ATO uses PAYG instalments to collect it in quarterly pieces instead.

Individuals and sole traders are entered automatically when all three of these apply:

  • Instalment income from your latest tax return of $4,000 or more.
  • Tax payable on your latest notice of assessment of $1,000 or more.
  • Estimated (notional) tax of $500 or more.

So if you had a good first year on your ABN, a notice soon after lodging is normal. You can also join voluntarily, which the ATO suggests if you're new to business.

PAYG instalments are not PAYG withholding

The names are almost the same, which doesn't help.

  • PAYG instalments: you prepaying your own income tax on business and investment income.
  • PAYG withholding: an employer taking tax out of their employees' wages and sending it to the ATO.

If you have no staff, the withholding part doesn't apply to you. The instalment part is about your own tax.

The two options, in plain words

Your notice or BAS shows one of two ways to pay.

  • Instalment amount. The ATO works out a set dollar figure from your latest return and lifts it for likely income growth. For 2026-27 that GDP adjustment is 5%. On a BAS it shows at T7. You just pay it.
  • Instalment rate. The ATO gives you a percentage at T2. Each quarter you multiply it by your instalment income for that quarter (T1), and the result goes at T11 and 5A. The ATO says this suits income that goes up and down a lot.

Instalment income is your gross business and investment income for the quarter, such as sales, fees, rent and interest. It leaves out the GST you charge, wages that already had tax withheld, and capital gains.

Worked example

Tom's two options for 2026-27

Example only. Tom is a freelance graphic designer in Hobart. His notice offers either an instalment amount of $1,600 a quarter or an instalment rate of 12%. His instalment income (sales without GST) for the four quarters of 2026-27 turns out to be $15,000, $12,000, $18,000 and $15,000. His tax for the year, worked out on his return, is $7,000.

The sums, step by step (Australian dollars)
StepSumResult
Amount option, four quarters$1,600 x 4$6,400 paid
Rate option, July to September$15,000 x 12%$1,800
Rate option, rest of the year($12,000 + $18,000 + $15,000) x 12%$5,400
Rate option, total$1,800 + $5,400$7,200 paid
At tax time, amount option$7,000 minus $6,400$600 to pay
At tax time, rate option$7,200 minus $7,000$200 back

Either way Tom's tax for the year is $7,000, and the option only changes how much he prepays along the way and whether he tops up $600 or gets $200 back.

Figures are an example. Your notice shows your own amount or rate.

Amount option or rate optionTom’s 2026-27 instalmentsAmount optionHow it’s setATO dollar figureEach quarter$1,600Year total$6,400At tax time$600 to paySimple, same every quarterRate optionHow it’s set12% of incomeJuly to Sept$1,800Year total$7,200At tax time$200 backMoves with your incomeExample only. Your notice shows your own amount or rate.Kitchen Table Sums
Scroll for more. In words: Two columns comparing Tom's options. Amount option: an ATO dollar figure of $1,600 each quarter, $6,400 for the year, $600 to pay at tax time. Simple, same every quarter. Rate option: 12% of income, $1,800 for July to September, $7,200 for the year, $200 back at tax time. Moves with your income. Example only. Your notice shows your own amount or rate.

What happens at tax time

When you lodge your 2026-27 tax return, the ATO adds up every instalment you paid and takes it off your tax for the year. If you paid more than you owe, you get the difference back. If you paid less, you pay the gap.

How instalments come off your billTom on the amount option$7,000tax for the yearminus $6,400four instalments paid$600left to payExample only. Instalments are credited when you lodge your return.Kitchen Table Sums
Scroll for more. In words: Three steps. $7,000 tax for the year, minus $6,400 in four instalments paid, leaves $600 to pay at tax time. Example only. Instalments are credited when you lodge your return.

Notice or BAS: which one will I get?

If you're registered for GST, your instalment usually sits on your quarterly BAS with your GST. If you report and pay instalments quarterly, use the instalment amount and have nothing else to report, you may get a simple instalment notice instead. You pay the amount by the due date. If it came by post, you don't need to send the notice back with your payment.

Quarterly instalments are generally due 28 days after the end of each quarter, so the first one of 2026-27 lines up with 28 October 2026. The October to December quarter usually gets a later date, 28 February, which moves to Monday 1 March in 2027 because 28 February is a Sunday. Always go by the date on your notice or BAS.

Can I change the amount?

Yes. If your income has dropped or jumped, you can vary your instalment when you lodge the statement, on or before its due date. You estimate your tax for the year, enter the new amount or rate, and add a reason code. The new figure applies to the rest of the year unless you vary again.

If you stop earning business or investment income altogether, you may be able to exit PAYG instalments, with some exceptions.

When to ask for help

If your income has changed a lot, or you have business and investment income mixed with a job, it's worth checking your estimate with the ATO or a registered tax agent before you vary.

Key numbers

The figures this guide uses, 2026-27 financial year
WhatFigure and source
What PAYG instalments are Regular prepayments of expected tax on business and investment income
ATO
Instalment due dates Generally 28 days after each quarter ends
ATO
Automatic entry, instalment income $4,000 or more
ATO
Automatic entry, tax payable $1,000 or more
ATO
Automatic entry, notional tax $500 or more
ATO
Voluntary entry Suggested for people new to business
ATO

Free official help

Questions people ask

Is a PAYG instalment extra tax?

No. It's a prepayment of your income tax for the year, and it's credited against your tax when you lodge your return.

Do I have to pay it if I'm not sure I'll earn as much this year?

You can vary it on or before the due date if you expect your tax to be lower. Be careful, because varying under 85% of your actual tax can mean interest on the gap.

Does my wage count as instalment income?

Generally no. Wages that already had tax withheld are left out. Instalment income is your business and investment income, without GST.

What happens if I pay too much?

Any excess is refunded after you lodge your tax return.

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Sources

  1. PAYG instalments (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments, accessed 2026-10-16.
  2. Starting PAYG instalments (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments/starting-payg-instalments, accessed 2026-10-16.
  3. Calculate your PAYG instalments (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments/calculate-your-payg-instalments, accessed 2026-10-16.
  4. How we calculate your PAYG instalment amount or rate (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments/calculate-your-payg-instalments/how-we-calculate-your-payg-instalment-amount-or-rate, accessed 2026-10-16.
  5. Instalment income (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments/calculate-your-payg-instalments/instalment-income, accessed 2026-10-16.
  6. How to vary your PAYG instalments (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments/how-to-vary-your-payg-instalments, accessed 2026-10-16.
  7. Stopping PAYG instalments (ATO). https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/payg-instalments/stopping-payg-instalments, accessed 2026-10-16.
  8. PAYG instalments, how to complete your activity statement (ATO). https://www.ato.gov.au/forms-and-instructions/payg-instalments-how-to-complete-your-activity-statement, accessed 2026-10-16.
  9. Instalment notices for GST and PAYG instalments (ATO). https://www.ato.gov.au/businesses-and-organisations/preparing-lodging-and-paying/business-activity-statements-bas/instalment-notices-for-gst-and-payg-instalments, accessed 2026-10-16.
  10. Due dates for lodging and paying your BAS (ATO). https://www.ato.gov.au/businesses-and-organisations/preparing-lodging-and-paying/business-activity-statements-bas/due-dates-for-lodging-and-paying-your-bas, accessed 2026-10-16.