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What are PAYG instalments and why they matter for your business

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When you run a business, trust, company or investment structure that generates income, you face not only annual tax-time responsibilities but also interim tax obligations. One of these is the PAYG (instalments) system. In practical terms: you prepay portions of your expected tax liability across the year, rather than waiting for one big lump at lodgement.

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Using PAYG instalments helps you:

• Maintain better cash-flow by spreading the tax burden.
• Reduce the risk of a large unexpected tax bill when you lodge.
• Stay compliant with ATO requirements and avoid unnecessary interest or penalties.
  (Australian Taxation Office)

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This guide outlines:

• Who might need to start PAYG instalments.
• How the system works, what your options are.
• How to register or opt into it.
• How to calculate amounts, report and pay.
• How to vary or exit the system if your circumstances change.
• How Trinity Accounting Practice supports you through all of this.

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Who needs to enter the PAYG instalments system

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Automatic entry

The ATO may notify you automatically that you must pay PAYG instalments if you meet certain thresholds. For example:

• For individuals, sole-traders or trusts: if your latest tax return shows business and investment income above a threshold, tax payable above a minimum, and estimated (notional) tax above a certain amount.
• For companies: if business and investment income is large or you’re the head company of a consolidated group.

If you are notified, you will receive an instalment notice or an activity statement advising your instalment obligations. (Australian Taxation Office)

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Voluntary entry

If your business is new or you expect a profit ahead, you might opt-in early to PAYG instalments. Voluntary entry may provide:

• Better cash-flow management.
• Avoiding a large catch-up tax payment when you lodge.
• The ability to plan your tax payments rather than reacting.
  You can ask to enter the system via your myGov linked ATO account (for sole traders), or via your tax or BAS agent.

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When you may not need to

If your income is modest, or you incur large deductions, or your business is at a loss, you may not trigger automatic entry. Nevertheless it is prudent to assess whether voluntary entry suits your structure.

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How the PAYG instalments system works

Key concepts: instalment income, instalment amount, instalment rate

• Instalment income is your business and investment income (pre-GST, excluding certain items) used in calculating the instalment.
• The ATO offers two methods to calculate what you pay:
  1. Instalment amount – A fixed dollar amount notified by the ATO, based on your previous tax return and adjusted for growth indicators.
  2. Instalment rate – A percentage (provided by the ATO) applied to your instalment income for the period. You calculate the amount by multiplying your instalment income by the rate.

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Frequency of instalments

• Most businesses pay quarterly instalments: 28 days after the end of each quarter. (Australian Taxation Office)
• Some may pay monthly (if very large turnover) or annual-basis for smaller entities if eligible.
• When you first enter the system the ATO will advise the frequency.

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Reporting and paying

• If you are GST-registered you will often report PAYG instalments on your Business Activity Statement (BAS). (Australian Taxation Office)
• If not GST-registered you may lodge an instalment activity statement (IAS). (Australian Taxation Office)
• You pay the instalment by the due date to ensure credit towards your tax liability. Late payment may attract interest or penalties.

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How to start PAYG instalments for your business

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Step-by-step for new entrants

1. Review your latest tax return and projected profit (business and investment income) for the year ahead.
2. Check if you have received a notice from the ATO indicating a PAYG instalment obligation.
3. If you have not been notified but believe voluntary entry is helpful, log into your myGov-ATO Online services or contact your BAS/tax agent and ask to opt-in. (Australian Taxation Office)
4. Choose whether to use the instalment amount (ATO-calculated) or instalment rate option (if both are offered).
5. Ensure you understand the due dates and the reporting method (BAS or IAS) that applies.
6. Set up your bookkeeping, cash-flow forecasts and payment reminders to meet deadlines.
7. Monitor your income and deductions throughout the year in case you need to vary the amount.

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Practical tips for business owners

• Keep your business bookkeeping current, so you can estimate your profit and cash position.
• Build a tax-reserve bank account or accrual ledger so that when payment is due you have liquidity.
• Coordinate with your accountant (such as Trinity Accounting Practice) to model the impact of PAYG instalments on your cash-flow.
• If you have seasonal income (tradie, tourism, rental property etc) factor this into your projections.
• Review the amount early in the year if unexpected events (drop in income, new deduction) mean a change.

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How to calculate your instalments

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Using the ATO’s options

If you are eligible for both options you will see both on your instalment notice or BAS. You then decide: which method suits your business best?

• Instalment amount option: you pay exactly what is shown. Easy to budget. Useful when your income level is stable.
• Instalment rate option: more flexible. Useful if your business income moves significantly. You pay instalment income × rate.

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Example scenario

Suppose your latest tax return shows business and investment income of $300 000 and your tax payable was $45 000. The ATO calculates an instalment rate of 15%. If your instalment income for the quarter (pre-GST) is $75 000, your instalment payable would be:
$75 000 × 15% = $11 250

Alternatively, the ATO might give a fixed instalment amount of $12 000 for the quarter. You then compare which is better for your cash-flow and tax planning.

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When to reconsider your amount

You should think about varying your instalment if:

• You expect your income to drop significantly (e.g., business disruption, change in model).
• You expect deductions or losses to increase (e.g., startup expenses).
• Your income will increase sharply and the fixed instalment is too low (leading to surprise tax when you lodge).
  Note: If your varied instalments are too low (less than ~85% of your final tax liability) you may face general interest charges.

How to vary your PAYG instalments when circumstances change

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Why vary?

Your business environment can shift. A fixed instalment based on a prior year may no longer suit. You might run into cash-flow issues or overshoot your tax liabilities.

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How to vary

• Lodge a variation request via your BAS or IAS when you believe your amount will not reflect your expected tax. (Australian Taxation Office)
• Use the instalment rate option if it better reflects your forecast.
• Monitor mid-year and adjust if your profit or income trajectory diverges from the last return.
• Keep proper documentation of your forecasted figures and reasoning. This supports your position if the ATO queries your variation.

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Risks if you do nothing

• Paying too much: you tie up funds that could be used elsewhere.
• Paying too little: you face a large shortfall at lodgement, interest charges and possible penalties.

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Due dates and deadlines: what you must know

• For most taxpayers with quarterly instalments, payment is due 28 days after the end of each quarter. (Australian Taxation Office)
• If you receive an instalment notice your due dates will be indicated.
• Failure to lodge on time or pay may result in penalties or interest.
• If you are GST-registered, PAYG instalments will form part of your BAS; if not, you may receive an instalment activity statement (IAS). (Australian Taxation Office)

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Typical due date structure

• 28 October (for quarter ended 30 September)
• 28 February (for quarter ended 31 December)
• 28 April (for quarter ended 31 March)
• 28 July (for quarter ended 30 June)
  These dates may change if your instalment frequency differs (monthly or annual).

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Why PAYG instalments matter for different business structures

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Sole traders and individual investors

For these entities, the thresholds for automatic entry may be modest. If you carry on business and/or derive investment income, you should monitor whether you have been notified. Voluntary entry might be advantageous if you expect a good profit.

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Partnerships and trusts

Trusts with business or investment income often trigger instalments. Tracking the trust’s income and its underlying beneficiaries’ tax position is important for planning.

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Companies

Companies with turnover or business + investment income above thresholds may need to pay monthly instalments if large. The instalment calculation is slightly more complex due to corporate tax rates and aggregation rules.

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Rental property investors

Rental income counts as investment income. If you receive significant net rental profits and your tax payable meets the trigger, you may be in the instalment regime. Using PAYG instalments in this case helps avoid a lump-sum tax bill when you lodge.

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Common mistakes and how to avoid them

• Ignoring the instalment notice and paying only at lodgement. This often leads to a large tax bill and strained cash-flow.
• Assuming the fixed instalment amount is “safe” and never reviewing it. Business conditions change.
• Failing to budget and set aside funds for the instalment.
• Over-estimating deductions or under-estimating income and ending up underpaid.
• Neglecting to report the instalment correctly on the BAS/IAS.
• Letting bookkeeping lag, so you lack visibility when it’s time to vary.

Avoidance strategy for your business:

• Maintain timely bookkeeping and cash-flow forecasting.
• Schedule quarterly tax-reviews with your accountant (Trinity Accounting Practice).
• Set aside an instalment reserve from day one.
• Check each instalment notice when it arrives, and ask: “Does this still reflect my business this year?”
• Use the variation mechanism proactively when your business moves out of the assumptions.

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Why partner with Trinity Accounting Practice

At Trinity Accounting Practice (159 Stoney Creek Road Beverly Hills NSW 2209, 02 9543 6804), we specialise in helping business owners, tradespeople, NDIS providers, pharmacies, construction companies and rental investors navigate their tax obligations. Here’s how we assist with PAYG instalments:

• We review your last tax return and forecast the coming year’s income to advise on whether you should enter the PAYG regime.
• We model the two instalment options (fixed amount vs rate) and advise which suits your cash-flow profile.
• We set reminders and systems to lodge and pay on time.
• We monitor your business income during the year and recommend varying the instalment if circumstances change.
• We integrate your PAYG instalments into your broader tax-planning strategy, aligning with your BAS, bookkeeping and end-of-year return work.

Because you use tools like Xero, Xero Tax, Xero Practice Manager (XPM), and SuiteFiles, we embed these PAYG workflows within your systems, so you are on top of your tax obligations with minimal disruption.

📞 For a discussion on how PAYG instalments will impact your business, call 02 9543 6804 or book via https://calendly.com/ramy-hanna

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Frequently asked questions (FAQ)

Q: What if I expect a loss this year?
If you expect your income or tax payable to be much lower than the prior year, you can apply to vary your instalment downwards. But you must ensure you don’t drop below about 85 % of your expected liability to avoid interest.

Q: What happens if I pay too much?
Any over-payment of instalments is credited to your end-of-year tax liability and if excess remains, refunded.

Q: What if I miss a payment?
You may incur interest and lose partial tax-planning benefits. You should still lodge your activity statement and proceed.

Q: Can I change from amount option to rate option mid-year?
Generally no. Once the method is chosen for the year it applies for the rest of the year. You may switch for the next year.

Q: Does PAYG instalments replace my annual tax return?
No. You still must lodge your annual tax return for your entity (sole trader, company, trust, rental). The instalments are prepayments, not a substitution.

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Checklist for getting started this financial year

• Review last year’s tax return for business + investment income.
• Check if you received any ATO PAYG instalment notice.
• If not, consider voluntary entry and discuss with your accountant.
• Choose method (amount vs rate) after modelling cash-flow.
• Set aside funds each quarter for instalment payment.
• Ensure BAS or IAS lodgement is scheduled.
• Monitor your income forecast every quarter; if change >20-30 % consider variation.
• Keep proper bookkeeping and documentation to support forecasts.
• At year-end reconcile what was paid vs final tax — factor for next year.
• Build this into your broader tax-planning and business advisory framework.

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Final thoughts

PAYG instalments offer a disciplined, proactive way to meet your tax obligations. They help you avoid the shock of a large tax bill at lodgement-time. For busy business owners, tradespeople, rental-investors and service providers, the right instalment strategy means smoother cash-flow and fewer surprises.

Working with Trinity Accounting Practice, you get tailored advice, integration with your systems (Xero, XPM etc), and ongoing monitoring so instalments align with your actual business result.

👉 Trinity Accounting Practice

✅ Small Business Accounting Firm in Beverly Hills

☎️ 02 9543 6804

📍 159 Stoney Creek Road Beverly Hills NSW 2209

🌐 www.trinitygroup.com.au

‍📅 Weekend & after-hours appointments available!

📅 Booking Link https://calendly.com/ramy-hanna

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🌐 Our Virtual CFO division, VCFO Australia, provides strategic financial management, budgeting,forecasting, and compliance support for growing businesses andnot-for-profits: https://www.vcfoaus.au/

📌 Learn more about whatwe offer:
https://www.trinitygroup.com.au/services

📌 Discover the industries we specialise in:
https://www.trinitygroup.com.au/niches

📌 Read more tax and accounting tips on our blog:
https://www.trinitygroup.com.au/explore-learn

📌 Our mortgage brokeage division, Nexus Wealth Partners Pty Ltd clients with home loans, refinancing and business finance
https://nexuswealth.au/

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