PAYG Explained

The PAYG instalment system managed by the Australian Taxation Office (ATO) is designed to maintain healthy cash flow (and ensure taxes are paid) for anyone with their own business or investment income stream.

‘PAYG’ simply stands for ‘Pay As You Go’ and is an acronym used for two different processes systemised by the Australian Tax Office (ATO) for businesses in Australia: PAYG instalments and PAYG withholding.

How does PAYG work in Australia?

If you have a registered business or an investment income stream, the ATO may enter you into the PAYG instalment system automatically, or you can ask to be entered.
You make regular payments (instalments) during the year, typically every three months. The amount you pay is based on your business and investment income.
When you lodge your tax return, the PAYG instalments you have paid during the year are offset against your tax, leaving you with little or no tax to pay.

The difference between PAYG instalments and PAYG withholding

The PAYG instalment system is different to PAYG withholding.

PAYG withholding is when employers collect tax from the payments they make to you as their employee. They send those payments to the ATO, so they do not have a big tax bill at the end of each financial year.

This video explains the difference between PAYG withholding and PAYG instalments in more detail.

Paying PAYG instalments

The PAYG instalment system generally applies to individuals, organisations or trusts earning a certain amount of individual, gross business or investment outcome.

There are some special rules and exceptions though, and your accountant should advise to suit your circumstances.

For example, companies or super funds need to complete PAYG instalments if the ATO calculates an instalment rate of above zero for your GST-registered organisations.

As an employer, you are legally obligated to withhold tax if your business:

Has employees
Has other workers (including contractors) where it is voluntarily agreed that you will withhold amounts from your payments to them
Makes payments to businesses that do not quote their Australian Business Number (ABN).

To learn about exceptions to PAYG withholding demands, talk to your accountant.

The bottom line

Paying regular PAYG instalments from your business or investment income stream at three-monthly intervals throughout the financial year has one obvious benefit: you don’t get stung by a huge tax bill at the end of that year. Yes, it can be hard managing cash flow sometimes – especially if your business is new – but leaving taxes owing can get you in serious arrears with the ATO, and that can mean unnecessary interest payments too.

Go deeper: Beware the death tax

Financial disclaimer

The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.