Most first-year sole traders are not automatically on PAYG instalments, because the ATO sets your instalments based on the business income reported in your most recent tax return — and in year one, there isn't one yet. That means your entire first year's tax can arrive as a single lump-sum bill when you lodge, rather than being spread across the year.
What PAYG instalments actually are
Pay As You Go (PAYG) instalments are regular prepayments towards the tax you will owe on your business and investment income for the year, similar in spirit to how PAYG withholding takes tax out of an employee's pay each pay cycle. The ATO generally starts you on instalments once your lodged tax return shows:
- Instalment income from business or investment sources of $4,000 or more
- Estimated tax for the year of $1,000 or more
- Taxable income above the tax-free threshold
Because these tests are applied to your most recent return, a first-year sole trader typically only enters the PAYG instalment system after lodging their first return — the ATO then sets quarterly instalments for the following year based on what that return showed.
Why that catches first-year sole traders out
If you are not on instalments during your first year, no tax is being prepaid on your business profit as you earn it. When you lodge your first tax return, the full year's income tax, Medicare levy and any other liabilities fall due at once — often many months after you actually earned the income and, in some cases, after you have already spent it. A sole trader who nets $80,000 in their first year, for example, could face a tax bill in the $15,000 range as a single payment, with no quarterly instalments having softened it along the way.
The two ways instalments are calculated once you're in
- Instalment amount: the ATO tells you a fixed dollar amount each quarter, based on your last return's notional tax, divided into four
- Instalment rate: the ATO gives you a percentage, which you apply to your actual quarterly business income — useful when your income varies a lot quarter to quarter, since the amount moves with your real earnings rather than being fixed
Once you're on the system, a rough quarterly instalment (last year's total tax ÷ 4) looks like this at a few profit levels:
| Prior year profit | Prior year total tax | Quarterly instalment |
|---|---|---|
| $50,000 | $5,387 | $1,347 |
| $80,000 | $15,120 | $3,780 |
| $100,000 | $21,520 | $5,380 |
| $120,000 | $27,920 | $6,980 |
Estimate your own figures with the Sole Trader / ABN Tax Calculator.
You can volunteer into instalments early
If you would rather smooth the first year's tax out instead of facing it as one bill, you can voluntarily enter PAYG instalments before the ATO would otherwise start them. This trades a bit of admin for predictability — you pay quarterly towards the year's tax as you go, using the instalment rate method (since there is no prior-year instalment amount to base a fixed figure on), rather than banking the full liability until lodgment day.
What to do instead if you stay off instalments
If you are not on PAYG instalments in your first year, the practical fix is the same discipline covered in our guide to sole trader tax rates: set aside roughly 30% of each invoice into a separate account as you go, so the lump sum at lodgment time is already covered rather than a surprise.
Frequently Asked Questions
Usually not automatically. The ATO generally sets instalments based on your most recent tax return, so in your first year there is nothing to base them on — your full first year's tax is typically paid as a lump sum when you lodge.
Typically from the year after your first tax return, once that return shows you meet the ATO's thresholds — $4,000 or more in instalment income, $1,000 or more in estimated tax and taxable income above the tax-free threshold.
Yes. You can voluntarily enter the PAYG instalment system before the ATO would otherwise start you, which spreads your tax across the year using the instalment rate method instead of facing one lump sum after your first lodgment.
Without instalments and without your own savings discipline, your full first year's income tax, Medicare levy and any other liabilities fall due at once when you lodge — which can be a serious cash flow problem if the money has already been spent.