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Varying PAYG Instalments: How and the 85% Rule

Updated 17 October 2026 · General information · 4 min read

General information only. Not tax, legal or financial advice. We are not the ATO. Check ato.gov.au or ask a registered tax agent. Last checked against ATO pages: 17 October 2026. Amounts and dates marked expected or not verified should be re-checked before you rely on them. Examples use made-up numbers. This page contains no affiliate links.

What is changing. The Budget announced on 12 May 2026 "Dynamic PAYG instalments", which would let businesses adjust instalments to real-time conditions from 1 July 2027; the ATO says these measures are not yet law. They do not change how you vary instalments in 2026-27. For 2026-27 the ATO's GDP adjustment is 5%, which applies if your instalments use the instalment amount (it does not affect the instalment rate method or annual payers).

Short answer: The ATO page "How to vary your PAYG instalments" (last updated 23 June 2026) says PAYG instalments are prepayments of your expected tax, you can vary the amount (option 1) or rate (option 2) if they are too high or low, and you do not have to vary at all: after you lodge your return, excess instalments are refunded and a shortfall is paid. If your varied instalments are less than 85% of your total tax payable, you may have to pay general interest charge on the difference (the ATO compares your instalments with the total tax payable on your instalment income for the income year), and there may be penalties. If you are not sure, the ATO says it is best not to vary.

When and how

• You vary when you lodge your activity statement or instalment notice, on or before the due date and before you lodge your tax return. The varied amount or rate applies to remaining instalments or until you vary again.
• Amount (option 1): estimate instalment income (gross business and investment income, excluding GST), estimate tax for the year, then pay a share by quarter: 25%, 50%, 75% and 100% of estimated tax, less earlier instalments. Two-instalment payers: 75% by April and 100% by July.
• Rate (option 2): varied rate = estimated tax divided by estimated instalment income times 100.
• You enter a reason code at T4, for example 21 (change in investments), 22 (business structure not continuing), 23 (significant change in trading conditions) or 27 (use of income tax losses).
• Claim a credit at 5B if the varied amount is negative; you are not required to.

Disasters

The ATO says it will not apply penalties or interest on variations if you took reasonable care to estimate your end-of-year liability, after floods or other disasters.

Made-up example

Using the ATO's worked example pattern: estimated tax $14,000; third quarter target $14,000 times 75% = $10,500; less $10,000 already paid = $500 for that quarter. If actual tax ends at $15,500, instalments of $14,000 are above 85% of that, so no interest is charged on the shortfall.

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FAQ

Do I have to vary if my income falls?

If you use the instalment rate, you generally don't need to vary just because income changed, because the payment moves with income; you would usually vary only if the taxable proportion has changed. If you use the instalment amount, a significant change in instalment income is a common reason to consider varying.

What if I overpaid?

The ATO says overpaid instalments are refunded after you lodge your return.

What we could not verify