Your first PAYG instalment notice: why year two's tax feels like it doubled

Here’s the idea in one sentence: once your business makes a real profit, the ATO stops waiting until the end of the year for its income tax and starts collecting some of it as you go.

The ATO calls these prepayments PAYG instalments, with PAYG short for “pay as you go”. The first time they appear is usually a few weeks after your first business tax return is processed, and it often lands right on top of the tax bill from that same return. That overlap is why so many second-year owners say, “Hang on, am I paying tax twice?”

You’re not. But you are paying for two years at once, just this once. This guide explains why, what the letter means, and how to make the overlap a planned cost instead of a shock.

What are PAYG instalments, in plain English?

Picture your income tax as a bill that used to arrive once a year, after the year was over. PAYG instalments turn it into a subscription: a smaller payment each quarter, during the year, towards the tax you’re expected to owe.

Come tax time, you still lodge a return. The ATO subtracts everything you’ve prepaid from the final figure: overpaid and the extra comes back to you, underpaid and you top it up.

It’s a lot like paying for a ladder in four parts while you’re still using it, instead of paying the full price a year after you’ve borrowed it. Our jargon buster has the one-line version if you need to explain it to a business partner.

Why does the ATO put you into the system?

The trigger is your most recent tax return. For sole traders, other individuals and trusts, the ATO switches instalments on by itself once that return clears three bars at the same time:

What the ATO looks at	The bar
Your business and investment takings for the year (counted before expenses, with GST and capital gains left out)	at least $4,000
The tax shown on your notice of assessment	at least $1,000
The ATO’s estimate of your tax for the coming year, which it calls “notional tax”	at least $500

Thresholds from the ATO’s page on entering the system.

Companies are treated differently. A company’s automatic entry generally starts at $2 million of instalment income (plus some other conditions), which is why plenty of small companies never get a notice in their early years.

Nobody has to wait for the letter, either. Joining early is allowed: your tax agent can arrange it, or you can sort it out yourself with the ATO online or over the phone. Some first-year owners do exactly that so year two never piles up.

Why does year two feel like a double tax bill?

Because in your first year, nobody collected any income tax during the year. Then, in year two, two things happen close together:

1. The bill for year one arrives with your notice of assessment.
2. Instalments for year two start, because that same return showed enough income to trigger them.

You’re catching up on last year and paying ahead on this year at the same time. It’s like filling a hole with sand while someone starts a second hole beside it. The good news is that it only happens once. From year three, most of each year’s tax has already been paid through instalments by the time you lodge, so the end-of-year bill shrinks.

An illustrative example

This is a made-up example with simplified tax figures, not advice for your situation.

Mia started a mobile dog-grooming business as a sole trader in July 2025. She didn’t enter PAYG instalments in her first year. Her 2025–26 return showed a profit of around $60,000, and her tax bill, including the Medicare levy, came to roughly $10,000.

A few weeks after her notice of assessment, the ATO wrote to her: she was now in the PAYG instalment system. Using the amount option, her quarterly instalment worked out at a little over $2,500, based on her last return and adjusted by the ATO for expected growth.

So in the months after lodging, Mia was facing:

What	Roughly	For which year
Tax bill from her first return	$10,000	2025–26
First quarterly instalment	$2,500+	2026–27
Her usual quarterly BAS (GST)	as normal	current quarter

None of that is unfair. It’s the cost of a profitable first year. But if she’d been spending her profit as if it were all hers, it’s a lot of cash going out in a short window.

When are PAYG instalments due?

Quarterly instalments run on the same calendar as a quarterly BAS. In a standard income year:

• the instalment for the September quarter falls due on 28 October
• the December quarter’s on 28 February
• the March quarter’s on 28 April
• the June quarter’s on 28 July

Dates from the ATO’s instalment due-date page.

If you’re registered for GST, instalments usually sit on the same activity statement as your BAS, which is why the first BAS and the first instalment can feel tangled together. If you lodge monthly for GST, the 21st of the month applies instead. Some smaller taxpayers are offered two instalments a year or a single annual instalment. Your letter from the ATO tells you which applies to you and when the first one is due.

Amount or rate: which option should a beginner pick?

When you get your first instalment notice, you’ll typically see two ways to pay:

• The amount option. One set dollar figure per quarter, calculated by the ATO from what you earned last year. Easy to budget for, no sums to do, but it’s the same figure in a flat quarter as in a flying one.
• The rate option. A percentage instead of a dollar figure. You apply it to the quarter’s business and investment takings, so a strong quarter costs more and a slow one costs less.

Quick check: which suits you?

• Your income is fairly steady month to month → the amount option is simple.
• Your income swings with seasons, big jobs or school terms → the rate option follows your cash.
• You’re unsure → ask your tax agent before the first quarter, because the ATO says your first-quarter choice generally sets the method for the rest of that year.

Should you vary your instalments?

You’re allowed to vary them if you genuinely expect this year’s tax to be lower, for example if a big contract has ended or you’ve taken on a major new cost. The ATO sets out the steps on its page about varying instalments.

Here’s the catch. Once your return is in, the ATO lines up what you paid against what you really owed. If your reduced instalments covered less than 85% of the real figure, general interest charge (GIC) can be added to the gap, and penalties are possible when the estimate wasn’t a reasonable one. Since 1 July 2025 you can’t claim GIC as a deduction, so there’s nothing to soften that cost.

Varying down to make the year-two squeeze go away usually just moves it to next year, with interest. Vary when your income has truly changed, not because cash is tight.

How to plan for the year-two tax hit

The fix is a habit you may already have from your first BAS: move tax money aside before you can spend it.

1. Before your first return is lodged, ask your accountant for a rough estimate of the tax bill and whether instalments are likely to start.
2. Add both to your cash flow forecast: the one-off bill on its due date, plus each quarterly instalment.
3. Divide the instalment by 13 and move that amount into your tax account every week. A $2,600 quarterly instalment is $200 a week, which is far easier to absorb than a lump sum.
4. Keep paying yourself a steady wage, not “whatever’s left”. A steady drawing makes it obvious when tax is eating into your living money.
5. Check in each quarter. If the year is running well ahead of last year, set aside a little extra, because your next return will top up the difference.

If you’re still in your first year, this is the moment to plan. Our first EOFY checklist covers the other end-of-year jobs that sit alongside it.

Already holding a notice and a bill that arrived together? You can ask a real person about your options in about a minute, with no credit check to enquire.

Myths about PAYG instalments

“It’s an extra tax.” It isn’t. Same tax, earlier timing. Whatever you prepay is counted towards the bill on your next return.

“Companies get them straight away too.” Rarely. Small companies are mostly below the $2 million mark where automatic entry begins, though a company can sign up by choice.

“If I ignore the notice, it goes away.” Sadly not. A missed instalment turns into a debt with the ATO, and interest starts building on it.

“Year two is what tax will always feel like.” Thankfully, no. Year two carries two years of tax; after that, you’re mostly paying one year at a time.

How does this affect borrowing later?

Lenders don’t mind that you pay PAYG instalments. To them, it’s a sign of a profitable business. What they look at is how you handle them:

• Your ATO statement of account shows whether instalments are paid on time.
• When a lender checks whether you can afford the repayments, instalments count as a regular outgoing, just like BAS and wages.
• If a gap has turned into an ATO balance, that’s considered case by case, and a payment plan you’re keeping to looks very different from a debt nobody is talking about.

Our loan-readiness quiz checks your tax habits along with the other things lenders look at.

Year two came with a tax bill and a new instalment? Let’s look at it together

A double tax hit in your second year is really a sign the business worked. It’s also a common moment for owners to wonder whether they need a buffer, a line of credit for the lumpy quarters, or simply a clearer plan for the next twelve months.

If that’s you, our short enquiry takes about 60 seconds. There’s no credit check when you first enquire, and we don’t send your details to a pile of lenders hoping one replies, so your phone won’t light up with strangers. A real person reads what you’ve told us, looks at your tax position alongside your trading, and calls you to explain the options in plain English. Please fill the form in accurately, including any ATO balance, so the first option we suggest is one that fits.

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