Why Do I Have to Pay PAYG Instalments?

Unfortunately, most SMSFs are required to pay PAYG Instalments. Your accountant does not enrol you in the PAYG System but rather the ATO automatically does once you have received a tax payable (or an estimated notional tax) of $500 or more in a previous tax year. Because the bar is so absurdly low, we are all stuck paying the ATO an estimated amount of tax quarterly in arrears rather than at the date of the tax return. These quarterly amounts effectively become a credit against the tax return reducing the payable or, if overpaid, becoming a refundable amount.

PAYG Instalments in a SMSF – Example

If an SMSF makes a $100,000 profit from employer concessional contributions between the members, investments, dividends, rents etc in 2025 and owes the ATO $15,000 in tax at the standard 15% rate the following will happen up lodging the 2025 return:

• The ATO sends the fund a bill for the $15,000 relating to the 2025 financial year due around the middle of May the following year (depending on the date of lodgement).
• The ATO starts sending quarterly IAS statement for $3,750 per quarter to get you to pay quarterly in arrears towards the fund’s 2026 financial year tax bill. Note that this is a little simplified for the purposes of our example and they actually use a more complicated formula available on their website.
• These can be varied down but if we vary your PAYG Instalment down and then have a payable the ATO will apply a penalty for incorrectly varying it avoid paying as we go.
• If these quarterly instalments are all paid during the year, then they sit as a credit against your annual tax bill. So, if for our example we assume that for the 2026 financial year there is a bill for $15,000 again it will be offset by the $ 3,750 paid each quarter and thus there will be no net payable at the end of the year.

In this way the ATO system estimates your annual tax bill for the SMSF based on your previous years history and then charges it quarterly in arrears.

FAQ for SMSF PAYG Instalments

What Are PAYG Instalments?

Pay as you go (PAYG) Instalments are an ATO method of collecting tax during a financial year. They can apply to all entities including individuals, companies and superfunds but individuals who are employees have rarely seen them as effectively their employer withholds funds for them each payday instead of them having to remit to the ATO directly but having the same cashflow effect. They are usually sent quarterly in arrears and if they are not paid on time are subject to interest and penalties from the ATO.

Why does the ATO Requires PAYG Instalments?

The government introduced the PAYG system back at the turn of the century with the A New Tax System (Pay As You Go) Act 1999 with the supposed mandate of assisting taxpayers to stay on top of their tax debts by collecting taxes progressively rather than in one lump sum at the end of the financial year. This naturally had the secondary effect of helping the government to better manage their own revenue and reduce the risk of unpaid debts having to be written off as taxpayers struggling to pay their taxes could be identified far earlier on a quarterly basis than the previous annual basis.

Who Has to Pay PAYG Instalments?

Pretty much any entity with a tax payable at the end of the year can be forced to enrol in the PAYG instalment system. Each type of entity has slightly different rules as to when the government will force them to enrol. For SMSFs it is when the previous year had a tax payable or a notional tax of more than $500 upon lodgment of the super tax return.

Why PAYG Instalments Can Start Unexpectedly

Often clients are caught out by one off event such as a capital gain on disposal of property or Crypto which is large but one off in nature pushing up their tax payable in a given year and thus sending their PAYG through the roof. In these circumstances we look to vary the instalments with the client.

Can You Vary SMSF PAYG Instalments?

Definitely, your SMSF Accountant can vary the PAYG instalments on your behalf with your written authorisation. This can be as simple as a quick email confirming your varied amount for the year and how you have calculated it. Keep in mind though the ATO can apply General Interest Charge and additional financial penalties for incorrect variations, so we never recommend being too aggressive with PAYG variations as the long-term damage from a near 10% non-deductible interest charge with penalties on top of that can be far worse than the cashflow hit.

What Happens if I don’t pay my PAYG Instalment?

We are all human and we all occasionally miss a PAYG Instalment notice, even accountants unfortunately. When this happens the ATO will send us a reminder which your SMSF Accountant will forward onto you via email. Generally, they don’t charge penalties on this first reminder but certainly if that reminder is also ignored then General Interest Charge and other penalties can be applied.

PAYG Instalments Are Not Extra Tax

It is important to remember that you are not paying any extra tax or more tax than you would pre-1999 before the PAYG Instalment system was introduced. The legislation purely changes the timing of the tax payments as opposed to the total quantum of tax. Any amount paid on your quarterly PAYG sit as a credit against your final SMSF Tax Return which it is lodged and if overpaid, will be refunded to you.

How PAYG Instalments Affect Cash Flow

There is nothing nice about the cashflow effect of the instalments and requires the trustee of the SMSF to set aside more cash reserves towards these quarterly tax bills which has the effect of reducing the investable balance of the fund. This cashflow concern cannot be prevented but our role is to help you to understand the timing of the payments so they can become manageable rather than stressful.

Common PAYG Instalment Mistakes

The government sends out literally millions of PAYG instalments every quarter, they have no sympathy for clients who don’t want to be in the system and have learned about it for the first time. Unfortunately, they are not optional, and many clients spend a lot of time and energy causing themselves a lot of stress calling and complaining to the tax office. Needless to say the tax office is not helpful on these calls and by the time the client tells us about their endeavours they have either had no effect as a best case scenario and, in other cases, actually made the situation worse as the ATO officer has varied it to Nil over the phone knowing you will likely get a penalty and not caring as they felt you were pushy to them on the call.

Understanding why you have PAYG Instalments

The key purpose of this blog is to try and help clients to understand why they have PAYG Instalments, the history of PAYG instalments and of course, the rules and calculations around these payments. If you have any specific questions around the PAYG charged to your SMSF or if you need help varying it then get in touch with one of our friendly team today.