PAYG explained: A simple guide for Australian SMEs

If you run an SME in Australia, understanding your tax obligations is key to staying compliant and managing your cash flow effectively. One important system to get your head around is Pay As You Go—a tax payment method used by the Australian Taxation Office (ATO) to collect income tax throughout the year. In this guide, we’ll break down exactly what PAYG is, how each type works, and what each means for your business.

What is PAYG?

Pay As You Go (PAYG) is a system used by the ATO that allows individuals and businesses to pay tax in instalments throughout the year. There are two types: PAYG withholding and PAYG instalments—so, what's the difference?

PAYG withholding

Certain employers are required to withhold a portion of employee or contractor payments and pay it directly to the ATO on their behalf. This is known as PAYG withholding and it applies if you [1]:

• Have employees
• Hire contractors who have agreed to have tax withheld from their payments
• Make payments to businesses without an ABN

If any of the above applies, you need to register for PAYG withholding through the Australian Business Register on the ATO website—and you must do so before you need to withhold your first payment.

But, there are some exceptions. If your employee or contractor earns below the tax-free threshold, for example, you generally won’t need to withhold tax. However, you should always base withholding on the individual’s TFN declaration and ATO tax tables.

Additionally, if your business is set up as a sole trader or partnership, you may be exempt from withholding income. Instead, you may be required to make PAYG instalments, which leads us to the next topic.

PAYG instalments

With PAYG instalments, business owners can make payments towards their expected income tax obligations at the end of each quarter [2]. This helps you plan ahead of tax season and stay on top of your tax commitments while maintaining a healthy cash flow.

Automatic entry

As a sole trader, you'll automatically enter the PAYG instalment system if all three of the following conditions are met: your instalment income from your latest tax return was $4,000 or more, the tax bill in your most recent return was $1,000 or more, and your estimated (notional) tax was $500 or more.

Similarly, a company will automatically enter the system if it had instalment income of $2 million or more in its latest tax return, has estimated (notional) tax of $500 or more, or is the head company of a consolidated group.

The ATO will notify you if you've entered the PAYG instalments system by:

• Sending you a letter in your myGov inbox, if you're registered for myGov with a linked ATO account
• Providing your instalment details through Online services for business or Standard Business Reporting (SBR) software, if you use one of those platforms
• Mailing you a paper letter, if neither of the above applies

Voluntary entry

You can choose to opt in to PAYG instalments before the ATO enrolls you automatically. This can be a smart move if you are new to business, or you think you'll earn business and investment income over the entry thresholds mentioned earlier.

Voluntarily entering the system allows you to spread your tax payments throughout the year, making it easier to manage your cash flow and avoid a large bill at tax time.

How PAYG impacts your business

PAYG is a key part of your business's tax obligations and affects both your cash flow and administrative workload:

PAYG withholding:

• Requires accurate record-keeping of wages, tax withheld, and superannuation contributions
• Adds to your administrative tasks, as you'll need to report and pay the amounts withheld to the ATO
• May lead to fines, interest charges, and even director penalties, in the case of non-compliance or late payments
• Helps you foster better relationships with your staff and contractors, as a compliant and reliable business
• Reduces available cash, since part of the payroll is set aside for tax. If you need help managing cash flow while staying on top of your tax obligations, Valiant can help. Simply get in touch with a lending expert and explore funding solutions tailored to your business needs.

PAYG instalments:

• Impact cash flow and require businesses to carefully forecast profits to avoid under- or overpaying
• Reduce the risk of a big tax bill at the end of the financial year by spreading payments throughout the year
• Increase the complexity of your BAS preparation, as instalments are reported and paid via your business activity statement
• May lead to penalties and interest charges if you underestimate income and underpay your instalments

How are PAYG instalments calculated?

When paying income tax in advance via instalments, you may be eligible to choose between two calculation methods: instalment amount (the ATO sets a fixed dollar amount for each quarter) or instalment rate (the ATO provides an instalment rate, which you then apply to your business income for the quarter) [3].

If eligible, both options will appear on your activity statement or instalment notice. All you need to do is choose your preferred method, which will apply for the remainder of the financial year. Regardless of which option you choose, the total amount of income tax you owe for the year will be the same. 

FAQs

How often do I have to pay PAYG?

PAYG instalments are usually paid quarterly, although some businesses may be required to pay monthly, depending on their income and ATO requirements. The payment frequency is outlined on your business activity statement (BAS) or instalment notice.

What happens if I miss a PAYG payment?

If you miss a PAYG instalment or payment, the ATO may apply a general interest charge (GIC) on the unpaid amount, as well as failure-to-lodge penalties. In case of on-going non-payment, debt collection actions may be put in place.

Make EOFY work for your business

EOFY is more than a compliance checkpoint. It's an opportunity to level up your small business and position it for future growth. But we know it can also be overwhelming, especially when cash flow is tight. That’s where Valiant comes in.

Whether you're preparing for tax season or looking to invest in growth without draining your cash reserves, we can help. We offer a variety of business finance solutions to suit your needs. Speak with one of our lending experts and we’ll match you with the right funding so you can focus on what matters—your business.

Want to feel confident this tax season? Download our EOFY guide for all our expert insights and practical tips.