What happens if I don't pay PAYG instalments?

What happens, step by step

1. The instalment falls due on your activity statement date, usually 28 October, 28 February, 28 April and 28 July for quarterly payers.
2. From the next day, general interest charge runs on the unpaid amount, compounding daily.
3. The debt sits on your activity statement account alongside any GST or PAYG withholding. The ATO's reminders and collection steps for it are the same as for any other debt.
4. If it stays unpaid, the ATO can offset your next refund against it, and larger or older debts move into the normal collection pathway.

If you have not lodged the activity statement at all, the failure to lodge penalty can apply as well, and the ATO can raise the instalment itself.

The instalment does not disappear at tax time

This is the part that confuses people. PAYG instalments are prepayments of the income tax you expect to owe for the year. When you lodge the return, the instalments you were liable to pay for the year are credited against the tax assessed, whether or not you actually paid them. So the return might show a small balance or even a refund, while the activity statement account still shows the unpaid instalment plus interest.

The debt has simply moved. You owe the same tax; it is just recorded on a different account. If the return shows a refund, the ATO will use it against the instalment debt before paying anything out.

If the instalment is too high, vary it

The ATO works out your instalment from your last return. If income has dropped since then, the instalment may be more than you will owe. You can vary it down on the activity statement, before the due date, so that what you prepay is closer to your expected tax. Be careful: if your varied instalments come to less than 85% of the tax you actually owe for the year, GIC applies to the shortfall and a penalty can follow. The rules are covered in can I vary PAYG instalments I can't afford.

If the instalment is right but you cannot pay

Varying an instalment you will genuinely owe just moves the bill to tax time, with interest. The better option is usually an ATO payment plan, which can be set up online for debts up to $200,000 and can include instalments alongside GST and other amounts. Lodge the activity statement on time regardless. For individuals and sole traders in serious hardship, PAYG instalments are one of the debts that can be considered for release, although companies cannot apply.

What to do next

1. Lodge the activity statement on time even if you cannot pay the instalment.
2. Check whether the instalment is higher than the tax you expect to owe this year, and vary it before the due date if it is.
3. If the amount is right but unaffordable, set up a payment plan before the ATO's reminders escalate.

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