AU Payg Instalments

Section 1 -- Quick reference

Quick reference field table

Field	Value
Country	Australia
Tax	PAYG income tax instalments (via BAS)
Primary legislation	TAA 1953 Sch 1 Div 45
Authority	Australian Taxation Office (ATO)
Portal	Online services for business, or ATO online services through myGov for sole traders
Currency	AUD only
Entry thresholds	Instalment income of $4,000 or more, tax payable on the latest assessment of $1,000 or more, and notional tax of $500 or more (individuals and trusts)
Exit threshold	Automatic exit when notional tax is under $500, instalment income is under $4,000, the tax debt on assessment is under $1,000 or the calculated rate is 0.0%
Methods	Instalment rate (T1/T2/T11) or instalment amount (T7)
GDP adjustment factor	5% for 2026-27 (6% in 2024-25); set each year and applied to the instalment amount method only
Variation safe harbour	85% of correct instalment amount
GIC rate	Base rate + 7% (updated quarterly)
Contributor	Open Accountants Community
Validated by	Pending -- requires sign-off by Australian CPA/CA
Validation date	Pending

BAS label summary

Label	Description
T1	Instalment income for the quarter
T2	ATO-notified instalment rate
T3	Varied instalment rate (rate method)
T4	Reason code for variation
T8	Estimated tax for the year (amount method variation)
T7	ATO-notified instalment amount
T9	Varied instalment amount (amount method)
T11	Instalment payable under the rate method (T1 x T2, or T1 x T3 when varied)
5A	PAYG income tax instalment
5B	Credit from PAYG income tax instalment variation

Conservative defaults

Ambiguity	Default
Method unclear	Check ATO notification -- they determine the method
Instalment income components uncertain	Include all business + investment income; exclude salary, CGT, exempt
Variation considered	Check 85% safe harbour before varying
First year of business	No instalments until first assessment
Annual election eligibility	Notional tax under $8,000 and not required to be registered for GST, or voluntarily registered and remitting GST annually; confirm the choice by the 28th after the first quarter

Section 2 -- Required inputs and refusal catalogue

Required inputs

• Minimum viable inputs — ATO notification of instalment rate (T2) or instalment amount (T7), quarterly instalment income figure.
• Recommended inputs — prior year income tax assessment, BAS due dates, current year income projections if varying.
• Ideal inputs — complete ATO notification, prior year assessment, quarterly P&L, BAS history.
• Refusal policy if minimum is missing — SOFT WARN. Without the ATO notification, the instalment rate or amount cannot be confirmed.

Refusal catalogue

• R-AU-PI-1 -- Companies/trusts/partnerships — Trigger: client is not a sole trader. Message: "This skill covers sole trader PAYG instalments only." (Refusal catalogue)
• R-AU-PI-2 -- PAYG withholding — Trigger: client asks about PAYG withholding (W labels). Message: "PAYG withholding is a separate obligation. See au-gst-bas." (Refusal catalogue)
• R-AU-PI-3 -- GST computation — Trigger: client asks about GST. Message: "GST computation is handled by the GST skill. This skill covers PAYG instalments only." (Refusal catalogue)

Section 3 -- Payment pattern library

This is the deterministic pre-classifier for bank statement transactions. When a debit matches a pattern below, classify it as a PAYG instalment payment.

3.1 ATO PAYG instalment debits

ATO PAYG instalment debits pattern table

Pattern	Treatment	Notes
ATO, AUSTRALIAN TAXATION OFFICE	PAYG instalment	Match with BAS quarterly timing
BAS PAYMENT, BAS DEBIT	PAYG instalment (combined with GST)	BAS payment includes both GST and PAYG
PAYG INSTALMENT, PAYG INST	PAYG instalment	Explicit description
ATO DIRECT DEBIT	PAYG instalment	Automatic payment

3.2 Timing-based identification (quarterly BAS, standard)

Timing-based identification table

Debit date range	BAS quarter	Confidence
20 October -- 5 November	Q1 (Jul-Sep) due 28 Oct	High
20 February -- 10 March	Q2 (Oct-Dec) due 28 Feb	High
20 April -- 10 May	Q3 (Jan-Mar) due 28 Apr	High
20 July -- 10 August	Q4 (Apr-Jun) due 28 Jul	High

Note: BAS payments typically combine GST and PAYG amounts. The PAYG component is the T11, T9 or T7 figure within the BAS.

3.3 Related but NOT PAYG instalments

Related but not PAYG instalments table

Pattern	Treatment	Notes
ATO PAYG WITHHOLDING, W1-W5	EXCLUDE	Employer withholding (separate)
ATO GST ONLY	EXCLUDE	GST-only payment
ATO SUPER, SUPER GUARANTEE	EXCLUDE	Superannuation guarantee
ATO PENALTY, ATO GIC	EXCLUDE	Penalty/interest
ATO REFUND	Flag for reviewer	Tax refund
ATO ACTIVITY STATEMENT	Combined payment	Includes GST + PAYG -- split for classification

3.4 BAS combined payment identification

A single BAS payment typically includes GST payable/refundable + PAYG instalment + PAYG withholding. To isolate the PAYG instalment component, the BAS form values (T7, T9 or T11) are needed.

Section 4 -- Worked examples

Example 1 -- Instalment rate method

Q1 business income = $42,000. Interest income = $800. ATO rate (T2) = 8.50%.

BAS label value table

BAS label	Value
T1 (instalment income)	$42,800
T2 (instalment rate)	8.50%
T11 (instalment payable)	$3,638

Example 2 -- Instalment amount method

Input: ATO-notified instalment amount (T7) = $3,150 per quarter.

Output: Report T7 = $3,150 on BAS. Pay by BAS due date.

Example 3 -- Variation of instalment rate

Input: ATO rate = 12%. Taxpayer estimates current year rate should be 8% (income dropped). Varied rate = 8%.

Computation: T11 = T1 x 8%, with the varied rate at T3 and the reason code at T4. Check: total varied instalments must be >= 85% of correct instalment (based on actual year-end assessment). If not, GIC applies.

Example 4 -- Below entry threshold

Input: Instalment income = $3,500. Notional tax = $800.

Output: Instalment income < $4,000. Not entered into PAYG instalment system.

Example 5 -- Bank statement classification

Input line: 28.10.2026 ; ATO ACTIVITY STATEMENT ; DEBIT ; BAS JUL-SEP 2026 ; -5,800.00 ; AUD

Classification: Combined BAS payment (GST + PAYG). PAYG instalment component = T7, T9 or T11 from the BAS. Flag for reviewer to split.

Section 5 -- Computation rules

5.1 Entry into PAYG instalment system

• Automatic entry conditions — An individual or trust enters automatically when the latest return shows instalment income of $4,000 or more, the notice of assessment shows tax payable of $1,000 or more, and notional tax is $500 or more. Voluntary entry is available below the thresholds. Instalment income is gross business and investment income excluding GST and capital gains. (ATO, Starting PAYG instalments)
• Method choice — The ATO notifies an instalment amount, an instalment rate, or a choice between them. When a choice is offered, the method selected on the first activity statement applies for the rest of that income year. The notified figures come from the latest return with the ATO's adjustments; use the notice, not a historical uplift percentage. (ATO, Calculate your PAYG instalments)

5.2 Instalment rate method (T1/T2/T11)

• Instalment rate method formula — T1 = quarterly instalment income (business + investment, excl. salary/CGT/GST) T2 = ATO-notified rate (estimated notional tax / instalment income x 100, capped at a reasonable rate of 55% for individuals; the GDP adjustment does not apply to the rate) T11 = T1 x T2 (rounded to whole dollars)
• What counts as instalment income — Instalment income is gross business and investment income for the period, excluding GST. It is not net profit, so business deductions do not reduce T1. Salary subject to PAYG withholding and net capital gains are excluded, but a capital gain still creates a final income tax liability, so include it in the whole-year cash forecast. Review unusual receipts against the ATO definition. (ATO, Calculate your PAYG instalments)
• Zero instalment rate — If the notified rate is zero, still report instalment income at T1 and retain the statement and the reconciliation behind it.

5.3 Instalment amount method (T7)

• Instalment amount method formula — T7 = notional tax x (1 + GDP adjustment factor) / 4 No income calculation needed. ATO pre-fills the amount.

5.4 GDP adjustment factor

• GDP adjustment factor 2026-27 — 5%, applied to the instalment amount (T7) for quarters starting on or after 1 April 2026; it was 6% in 2024-25. The factor is set each year from ABS data or by legislation and does not affect the rate method or annual payers. % (ATO, How we calculate your PAYG instalment amount or rate)

5.5 Variation

• Variation rule — A taxpayer varies the rate by entering the new rate at T3, or the amount by entering estimated annual tax at T8 and the varied amount at T9, with a reason code at T4 in either case. If total varied instalments < 85% of the benchmark (correct instalment based on actual assessment), GIC applies from each instalment due date.
• Varied rate formula — Varied rate = estimated annual tax on instalment income divided by estimated annual instalment income, multiplied by 100. Apply the varied percentage to actual instalment income for the period. If estimated annual instalment income is zero, the rate or amount can be varied to zero without estimating tax. Select the reason code that matches the circumstances. (ATO, How to vary your PAYG instalments)
• Varying the instalment amount — For quarterly amount instalments the cumulative targets are 25%, 50%, 75% and 100% of estimated annual tax: work out the target for the quarter, deduct earlier instalments and add back any earlier variation credits. A taxpayer who enters the system part-way through the year treats their first instalment quarter as the first quarter. If the result is negative, report zero at T9 and 5A and claim any credit for earlier instalments as a positive amount at 5B; claiming it is optional because instalments are reconciled through the annual assessment. Twice-yearly payers pay 75% in April and the balance in July. (ATO, How to vary your PAYG instalments)
• Estimate the whole year, not turnover times a rate — A variation changes prepayments without changing the final liability. Estimate the tax attributable to instalment income from a current full-year forecast that includes other income, deductions and offsets. Under the rate method the instalment already rises and falls with income; a changed profit margin can justify a variation, a temporary cash shortage does not. If payment is difficult, lodge the statement and discuss a payment arrangement with the ATO. (ATO, How to vary your PAYG instalments)
• Timing and records — Lodge the variation on or before the instalment due date and before the income tax return for that year is lodged; it applies to the remaining instalments until another variation or the end of the year. Keep the forecast, assumptions, calculation, reason code and lodged statement, review the forecast when conditions change, and match instalment credits on the assessment to the instalment account before treating an expected credit as cash. (ATO, How to vary your PAYG instalments)

5.6 Year-end credit

• Year-end credit rule — Total PAYG instalments credited against annual income tax assessment. Overpayment: refund or offset. Underpayment: balance due with assessment.

Section 6 -- Penalties and interest

6.1 General Interest Charge (GIC)

• GIC rate — base rate (90-day bank bill rate) + 7% (Updated quarterly. Applies from instalment due date if variation results in < 85% of correct amount.)
• GIC is no longer deductible — General interest charge and shortfall interest charge incurred on or after 1 July 2025 cannot be deducted, whatever year the debt relates to, and a later remission of that interest is not assessable. (ATO, Denying deductions for ATO interest charges)

6.2 Late BAS lodgement penalty

• Late BAS lodgement penalty — One penalty unit for each 28-day period or part, up to 5 periods: $364 a unit from 1 July 2026 ($1,820 maximum for a small withholder) and $330 from 7 November 2024 to 30 June 2026. Medium withholders pay double and large withholders five times. (ATO, Penalty units; ATO, Failure to lodge on time penalty)

6.3 Safe harbour

• Safe harbour rule — If varied instalments total >= 85% of the benchmark instalment, no GIC.
• 85% is a floor, not a target — Where varied instalments fall below 85% of the tax payable on instalment income, general interest charge applies to the difference and penalties can follow. The figure is not licence to understate tax deliberately, and it does not remove other interest charges. (ATO, How to vary your PAYG instalments)

Section 7 -- Annual instalment election

• Annual election eligibility and effect — An individual can pay one annual instalment where the latest notional tax the ATO notified is under $8,000, the first quarter's statement has not been lodged, and the person is not required to be registered for GST or is voluntarily registered and remits GST annually. Confirm the choice by the 28th day after the end of the first instalment quarter. A self-preparer then lodges the return by 31 October with no separate instalment; a taxpayer using an agent pays the annual instalment by 21 October and before the return is lodged. (ATO, When are PAYG instalments due?)

Section 8 -- Edge cases

• Edge cases — Not entered into PAYG system until after first assessment. No instalments in Year 1. Tax shock in Year 2. Flag for reviewer. Instalment rate method auto-adjusts. If using amount method, consider variation in low-income quarters. Instalment income = total across all activities. Single rate applies to aggregate. Interest, dividends, rent are instalment income. Employees with significant investment income may enter PAYG system. ATO-notified rate already includes Medicare levy (2%) and any surcharge. No separate adjustment needed. The ATO removes an individual automatically when notional tax drops below $500, instalment income falls below $4,000, the tax debt on assessment is under $1,000 or the rate is 0.0%; a taxpayer who has stopped earning business or investment income can also ask to exit. (ATO, Stopping PAYG instalments)

Section 9 -- Self-checks

Before delivering output, verify:

• Entry thresholds checked ($4,000 instalment income, $1,000 tax payable, $500 notional tax)
• Correct method identified (rate vs amount)
• T1 includes only correct components (no salary, no CGT, no GST)
• T2 matches ATO notification or is validly varied
• 85% safe harbour checked if variation applied
• GDP adjustment factor current (5% for 2026-27)
• BAS due dates correct
• Year-end credit against annual assessment noted
• First-year exception flagged if applicable
• Output labelled as estimated until Australian CPA/CA confirms

Test 1 -- Instalment rate method

Input: T1 = $42,800. T2 = 8.50%. Expected: T11 = $3,638.

Test 2 -- Instalment amount method

Input: Prior year notional tax = $12,000. GDP adjustment = 5%. Expected: Annual = $12,600. T7 = $3,150/quarter.

Test 3 -- Below entry threshold

Input: Instalment income = $3,500. Expected: Not entered into system.

Test 4 -- Variation with safe harbour check

Input: ATO rate 12%. Varied to 8%. Actual correct rate = 10%. Expected: Varied total = 80% of correct. Below 85%. GIC applies.

Test 5 -- First year

Input: New sole trader, no prior assessment. Expected: No instalments. Flag Year 2 tax shock risk.

Test 6 -- Year-end credit (overpayment)

Input: Total instalments paid = $15,000. Actual tax = $12,000. Expected: $3,000 overpayment refunded or offset.

Prohibitions

• NEVER include salary, net capital gains, or GST in instalment income (T1)
• NEVER vary the instalment rate or amount without checking the 85% safe harbour
• NEVER assume the first year of business requires PAYG instalments
• NEVER ignore the GDP adjustment factor when checking T7, and NEVER apply it to the instalment rate
• NEVER conflate PAYG instalments (T labels) with PAYG withholding (W labels)
• NEVER present instalment figures as definitive -- the ATO notification is authoritative

Disclaimer

This skill and its outputs are provided for informational and computational purposes only and do not constitute tax, legal, or financial advice. Open Accountants and its contributors accept no liability for any errors, omissions, or outcomes arising from the use of this skill. All outputs must be reviewed and signed off by a qualified professional (such as a CPA, EA, tax attorney, or equivalent licensed practitioner in your jurisdiction) before filing or acting upon.

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Contributed by Ryan Duguid.