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Guide 2 of 5 · After the first return

PAYG instalments in your first years as a sole trader

The ATO decides whether you pay PAYG instalments from your latest tax return, so automatic entry follows a return rather than your first invoice. In its own example, an investor who could enter voluntarily but chooses not to faces a tax bill when they lodge their next return, then automatic entry for the following financial year.

General information about the ATO’s rules, not tax advice for your situation. The official place to check is the ATO’s PAYG instalments pages; a registered tax agent can say how they apply to you.

What they are, for someone who used to be on a payslip

PAYG instalments are regular prepayments of the expected tax on business and investment income. They are usually paid once every 3 months, and when the tax return is lodged, the instalments paid during the year are offset against the tax, “leaving you with little or no tax to pay.”

They are not the same thing as PAYG withholding. Withholding is the employer’s job: tax comes out of each employee’s pay and goes to the ATO along the way, which is what spares employees a large bill at year’s end. A marketer who leaves a salaried job to invoice clients steps out of the first system; instalments are the way tax on business income is prepaid during the year instead.

The first two years, in order

  1. The first year of invoicesThe ATO decides whether you pay instalments from what you reported in your latest tax return. You don’t have to wait for that: the ATO says it is a good idea for someone new to business, or who thinks their income will pass the threshold, to enter voluntarily.
  2. The first return is lodgedAn individual, including a sole trader, enters the system automatically when they have all three of these: instalment income from the latest tax return of $4,000 or more, tax payable on the latest notice of assessment of $1,000 or more, and estimated (notional) tax of $500 or more. These are the thresholds as the ATO’s page states them, checked in October 2026.
  3. A letter arrives“We will let you know when you have entered the PAYG instalments system.” The ATO says when to pay, how often (most people pay quarterly) and how much, with the options for working it out. Payments start once it sends an activity statement or instalment notice; if instalments are your only reporting obligation, you get an instalment notice.
  4. Each quarterInstalments are generally due 28 days after the end of each quarter.
  5. The next returnThe instalments are credited against the year’s income tax. The ATO refunds any excess, and you pay any shortfall.

The ATO’s own example of an investor who could enter voluntarily spells out the cost of waiting: “If he chooses not to enter, he will receive a tax bill when he lodges his next tax return and will automatically be entered into the system for the following financial year.” Read together, that is a bill for one year followed by instalments for the next.

Entering voluntarily

The ATO sets out three steps: estimate the tax, ask to enter, then pay.

  1. Estimate. Work out your expected yearly business and investment income and your allowable deductions, to arrive at the tax to pay by instalments. The ATO has a PAYG instalments calculator for this.
  2. Ask. “If you are an individual taxpayer or sole trader, you can make a request to start PAYG instalments using your myGov account linked to the ATO’s Online services.” A registered tax agent can also make the request.
  3. Pay. Pay each instalment by its due date.

The ATO’s worked example of a sole trader then divides the calculator’s yearly estimate by 52 to know how much to put aside each week, so the money is there when the quarterly activity statement comes.

When client work comes and goes

There are two ways to pay: an instalment amount the ATO calculates, or a calculation of your own using an instalment rate it gives you.

The amount is worked out from your latest tax return and adjusted for likely growth in income, based on changes in Australia’s gross domestic product. The ATO sets the GDP adjustment for the 2026–27 income year at 5%. From 1 July 2021, a business entity with an aggregated turnover under $50 million can use this option.

The rate is a percentage you multiply by your business and investment income for the period. The ATO says this option is best if that income changes a lot and you want to manage cash flow, because the payments go up and down with it. A marketer whose clients arrive in bursts is the kind of income that description fits.

If the amount looks wrong

Instalments can be varied if they are too high or too low. The ATO attaches one warning: if you vary downwards and end the year with a significant tax shortfall (15% or more), you may be charged interest.

Once business and investment income stops, leaving the system may be possible.

Instalment income is your gross business and investment income, excluding GST. The invoices behind it are covered in the tax invoices guide, and home running costs that come off your income are in the working from home guide.