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PAYG Quarterly Instalments & Employer Payroll Tax Guide (2026–27)

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PAYG Quarterly Instalments & Employer Payroll Tax Guide (2026–27)

Managing business tax in Australia requires balancing cash flow across both federal and state tax obligations.

At the federal level, the Australian Taxation Office (ATO) enters profitable sole traders, freelancers, investors, and companies into the Pay As You Go (PAYG) Instalments system to prepay income tax quarterly.

At the state level, employers whose annual Australian wages exceed statutory threshold limits must pay State Employer Payroll Tax to their state revenue office.

This comprehensive guide outlines how PAYG instalments are triggered and calculated, the difference between the Instalment Rate and Instalment Amount methods, how to vary an instalment, and state-by-state employer payroll tax thresholds.

1. When Does the ATO Automatically Put You on PAYG Instalments?

The ATO automatically enrols individuals and business entities into the PAYG instalments system if your most recently lodged tax return meets both of the following statutory criteria:

  • For Individuals & Sole Traders:
    1. Your gross instalment income (business and investment income, excluding PAYG salary wages) was $4,000 or more; AND
    2. Your final tax payable balance on your last tax assessment was more than $1,000.
  • For Companies & Trusts:
    1. Gross instalment income was $2 million or more; OR
    2. Estimated tax payable was $8,000 or more.

Once enrolled, the ATO issues a quarterly activity statement (BAS or IAS) requiring you to prepay your estimated tax every 3 months.

2. Choosing Between Option 1 vs. Option 2 on Your BAS

When lodging your quarterly activity statement, the ATO allows you to choose between two calculation methods:

MethodHow It WorksBest Suited For
Option 1: Instalment Amount (Pre-Calculated by ATO)The ATO calculates a fixed dollar amount based on your previous year's tax return + GDP indexation factor.Businesses with steady, predictable year-round income who want simple admin.
Option 2: Instalment Rate (% of Actual Revenue)You take your actual gross income for the quarter and multiply it by the ATO's nominated percentage rate.Businesses with seasonal, fluctuating, or declining revenue (you only pay tax on money actually earned that quarter!).

Varying Your PAYG Instalment:

If your business experiences a downturn or lost a major client, you can vary your instalment amount downwards on your BAS. However, if your variation underestimates your final annual tax liability by more than 15%, the ATO may apply general interest charge (GIC) penalties.

3. State Employer Payroll Tax Thresholds (2026–27)

Payroll Tax is a self-assessed state tax levied on employers whose total Australian taxable wages (including gross salaries, contractor fees, bonuses, superannuation, and reportable fringe benefits) exceed state thresholds:

State / TerritoryTax-Free Wage ThresholdStandard Payroll Tax Rate
New South Wales (NSW)$1,200,0005.45%
Victoria (VIC)$900,0004.85% (Regional VIC = 1.21%) + COVID surcharge
Queensland (QLD)$1,300,0004.75% – 4.95%
Western Australia (WA)$1,000,0005.50%
South Australia (SA)$1,500,0000.0% to 4.95% (Stepped scale)
Tasmania (TAS)$1,250,0004.0% – 6.0%
ACT$2,000,000 (Highest threshold)6.85%
Northern Territory (NT)$1,500,0005.50%

Note: If your business operates across multiple states or is part of a corporate group, thresholds are apportioned across your total nationwide payroll.

4. Reconciling Instalments at Year End

PAYG instalments are not an additional tax—they are tax credits:

  • If you paid $24,000 across 4 quarterly instalments throughout the financial year, but your final annual tax bill is $20,000, the ATO immediately refunds the $4,000 excess in cash upon lodgment!

5. Calculate PAYG Instalments & Payroll Tax

Model your quarterly tax provisions and state payroll tax liabilities with our free tools:

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