What Is PAYG? PAYG Withholding and PAYG Instalments Explained
Author
Emmanuel Sarris
Date Published
In Australian tax, PAYG stands for Pay As You Go. It's the ATO's system for collecting income tax during the year, as income is earned, instead of in one lump sum after you lodge your tax return. Whatever is paid through PAYG during the year is credited against your tax bill when your return is assessed.
PAYG has two separate parts, and people often mix them up:
PAYG withholding: a business withholds tax from payments it makes to other people (mainly wages to employees) and sends it to the ATO.
PAYG instalments: you pay instalments towards the tax on your own business and investment income, because no one is withholding tax from it.
This guide explains both, who they apply to, how they're reported and when they're due.
PAYG withholding
If you run a business and pay employees, you generally have to withhold tax from their pay and send it to the ATO. Withholding also applies to some other payments, including:
salary, wages, allowances and leave paid to employees
directors' fees paid to company directors
payments to contractors who have a voluntary agreement with you to have tax withheld
payments to labour hire workers
payments to suppliers who don't quote an ABN (see below)
You must register for PAYG withholding before you make the first payment that is subject to withholding, even if no tax ends up being withheld from it. Businesses with an ABN can register through Online services for business, through a registered tax or BAS agent, or when applying for an ABN. See our step-by-step guide to registering for PAYG withholding.
How much to withhold
The amount to withhold from each payment comes from the ATO's tax tables (weekly, fortnightly, monthly and others), which are built into payroll software. The tables were updated for payments made from 1 July 2026 to reflect the cut in the 16% tax rate to 15%, so make sure your payroll software is up to date. Our post on PAYG withholding rates has more detail.
What each employee has withheld depends on the TFN declaration they give you when they start, including whether they claim the tax-free threshold. As a rule, an employee should claim the tax-free threshold from one payer only, usually the one that pays them the most. If they claim it from two employers, too little tax is likely to be withheld and they may get a bill when they lodge their return. The exception is someone whose total income from all sources will be $18,200 or less for the year.
If a payee doesn't give you their TFN or ABN
No TFN: if a resident employee doesn't give you their TFN (or claim an exemption), you must withhold 47% of the gross payment (45% for a foreign resident). If they've told you they've applied for a TFN, they have 28 days to provide it before this rate applies.
No ABN: if a supplier invoices you for goods or services without quoting an ABN (and none of the exceptions apply), you must withhold 47% of the payment and send it to the ATO.
For example, if a supplier without an ABN invoices you for $1,000, you withhold $470, pay the supplier $530, and report the $470 on your activity statement.
Reporting: Single Touch Payroll and the activity statement
Employers report wages and the tax withheld to the ATO through Single Touch Payroll (STP) each time they pay their employees. Withheld amounts are also reported, and paid, through the activity statement:
W1: total salary, wages and other payments
W2: amounts withheld from the payments shown at W1
W4: amounts withheld where an ABN wasn't quoted
W3: other amounts withheld (for example, from interest or dividends where no TFN was quoted)
W5: total amounts withheld (W2 + W4 + W3)
If you report through STP, the ATO can pre-fill W1 and W2 from your STP data. W3 and W4 aren't covered by STP, so you complete those yourself. For more on lodging, see our guide to the business activity statement.
When to pay withheld amounts
How often you pay depends on how much you withhold in a year:
Small withholders ($25,000 or less a year): usually quarterly, on the activity statement. Quarterly due dates are generally 28 October, 28 February, 28 April and 28 July.
Medium withholders ($25,001 to $1 million): monthly, generally by the 21st of the following month.
Large withholders (more than $1 million): pay electronically within days of each payday, rather than with a periodic activity statement.
The ATO reviews your withholding each year and will write to you if you move into a different category.
End of year: income statements, not payment summaries
Employers who report through STP don't issue payment summaries any more. Instead, they finalise their STP data, generally by 14 July, and each employee's income statement in ATO online services (through myGov) is marked 'tax ready'. Employees should wait for that status before lodging their tax return. The tax withheld shown on the income statement is credited against the tax on their assessment.
PAYG instalments
PAYG instalments cover income that has no tax withheld from it, such as business income of a sole trader, rent, interest and dividends. Instead of facing one large bill after you lodge, you pay instalments during the year towards your expected tax.
The ATO enters individuals (including sole traders) into the system automatically when their latest tax return shows all of the following:
instalment income (gross business and investment income) of $4,000 or more
tax payable on the latest assessment of $1,000 or more
estimated (notional) tax of $500 or more
Companies and super funds have different entry rules. You'll be told by an instalment activity notice when you've been entered. You can also choose to enter the system voluntarily.
How instalments are worked out
Instalment amount method: the ATO works out the amount for you from your latest return. For 2026–27 the ATO increases these amounts by a GDP adjustment of 5%.
Instalment rate method: the ATO gives you a rate, and you multiply it by your actual instalment income for the quarter. For example, $20,000 of instalment income at a 12% rate is a $2,400 instalment. This suits income that goes up and down.
You can vary an instalment if you expect the ATO's figure to be too high or too low, but if you vary it too low you may be charged interest. Some taxpayers can pay one annual instalment instead of quarterly ones.
When instalments are due
Quarterly instalments are generally due on 28 October, 28 February, 28 April and 28 July, usually on your activity statement or instalment notice. Our guide to PAYG instalments covers the methods and variations in more detail.
PAYG withholding vs PAYG instalments at a glance
Who pays: withholding is collected by a payer (such as an employer) from someone else's payment; instalments are paid by you on your own income.
What income: withholding covers wages and certain other payments; instalments cover business and investment income with no tax withheld.
How it's set: withholding comes from the ATO tax tables and TFN declaration; instalments come from your latest tax return.
Reporting: withholding is reported through STP and at W1 to W5; instalments are reported on your activity statement or instalment notice.
Many people deal with both. An employee with a rental property, for example, has tax withheld from their wages and may also pay instalments on their rental income. A sole trader with staff withholds tax from employees' wages and pays instalments on their own business profit. If you're a sole trader, our guide to paying tax as a sole trader explains how it fits together.
Whether you're registering for PAYG withholding for your first employee, setting up STP, or trying to work out whether your PAYG instalments are right, we can help. Call us on 0488 854 200, contact us or book an appointment.
How do I get help with this from the ATO?
The ATO provides guidance through ato.gov.au, the Small Business Support Line (13 28 66), and Online Services for individuals and businesses. For complex situations, a registered tax agent provides advice tailored to your specific circumstances and professional indemnity protection. You can verify agent registration at the TPB register at tpb.gov.au.
What records do I need to keep for tax purposes in Australia?
Most tax records must be kept for five years from the date of lodgement or the date the transaction occurred, whichever is later. Records must be in English or convertible to English and must be sufficient to explain the income and deductions in your return. The ATO can request records at any time during the retention period.
When do I need a registered tax agent in Australia?
Consider a registered tax agent when your affairs involve multiple income sources, business activity, investment properties, capital gains, or overseas income. Agents extend your lodgement deadline, provide safe harbour protection, and take professional responsibility for the advice given. Verify registration at tpb.gov.au.
How does the ATO calculate penalties for compliance failures?
The failure to lodge penalty is based on penalty units ($364 per unit from 1 July 2026), accruing per 28-day period for late returns and BAS lodgements. Incorrect information penalties range from 25% to 75% of the tax shortfall depending on whether the behaviour was careless, reckless, or intentional. Proactive disclosure before an audit begins typically results in significantly reduced penalties.
What is the difference between tax avoidance and tax minimisation?
Tax minimisation is the legal arrangement of your affairs to reduce tax — claiming all eligible deductions, using appropriate structures, and timing income and expenses. Tax avoidance involves arrangements that technically comply with the law but achieve outcomes parliament did not intend. The ATO can apply Part IVA anti-avoidance rules to cancel benefits from avoidance arrangements.
What is GST turnover? Current and projected tests, the $75,000 threshold ($150,000 for not-for-profits), what to include and exclude, when to register.
