Instalment Income

Instalment income is the gross business and investment income that PAYG instalments are calculated on: sole trader and partnership income (GST-exclusive), rent, interest, dividends and trust distributions. Salary already under withholding and capital gains are excluded from the base, though tax on both still lands at assessment.

What counts and what does not

The test is ordinary income with no tax collected on it yet. Employer withholding already covers wages, so they stay out; GST is collected through the BAS, so it stays out; capital gains are statutory rather than ordinary income, so they stay out of the base too.

Counts as instalment income

  • Sole trader and partnership business income, GST-exclusive
  • Rent from investment properties
  • Interest and dividends
  • Trust distributions

Does not count

  • Salary and wages already under PAYG withholding
  • Capital gains (the tax on them still arrives at assessment)
  • GST collected on sales
  • Exempt income

The figure matters twice: crossing $4,000 of instalment income in a lodged return is one of the triggers that pulls you into the system, as covered in the PAYG instalments guide, and it is the base your quarterly payments are calculated on once you are in.

Instalment income vs taxable income

Instalment income is a gross figure: business takings and investment receipts before any deductions. Your final tax is assessed on taxable income, which is that gross minus expenses. The gap between the two is why instalments rarely match the final bill to the dollar. The rate the ATO gives you already builds in last year's relationship between gross income and tax, so applying it to this year's gross gets close, but a year with unusually high expenses will over-collect and a lean-cost year will under-collect. The correction happens at assessment, where every instalment paid is credited against the tax on taxable income.

Notional tax

Notional tax is the ATO's estimate of the tax you will owe on this year's instalment income, built from your last lodged return. It is the figure your instalment rate comes from: the ATO divides notional tax by instalment income and multiplies by 100. The GDP adjustment factor, 5% for 2026-27, lifts the instalment amount under option 1 and does not touch the rate under option 2.

Full detail, including the reasonable rate ceiling and the four things that inflate a rate, is on the notional tax page.

How the instalment rate is derived

The rate on your notice is notional tax divided by instalment income, expressed as a percentage. It is an average rate, not your marginal bracket. As an illustration on 2026-27 resident rates: a sole trader whose only income is $80,000 of business profit pays about $16,120 in tax and Medicare levy, so the equivalent rate would be around 20.2%. An actual notice derives the percentage from your last lodged return, so it lags your current income by a year or more. The sole trader tax calculator works the same figures over a full year. Each quarter you multiply the rate by that quarter's actual instalment income, which is why the rate method tracks a variable income better than the fixed amount. The PAYG instalment calculator runs both views on your own figures, and the surrounding vocabulary, from taxable income to marginal rates, is defined in the glossary.

Frequently asked questions

What counts as instalment income?
Gross business and investment income with no tax collected on it yet: sole trader and partnership income on a GST-exclusive basis, rent from investment properties, interest, dividends and trust distributions.
Is salary included in instalment income?
No. Wages already covered by PAYG withholding stay out of the base, because your employer is already collecting tax on them each payday.
Are capital gains part of instalment income?
No. Capital gains are statutory rather than ordinary income, so they are excluded from the instalment base. The tax on them still arrives at assessment, which is a common reason a final bill exceeds the instalments paid.
Is instalment income gross or net of expenses?
Gross. It is business takings and investment receipts before deductions, while your final tax is assessed on taxable income after expenses. That gap is why instalments rarely match the final bill to the dollar.
What is notional tax?
The ATO's estimate of the tax you will owe on this year's instalment income, built from your last lodged return. Divided by instalment income and multiplied by 100 it gives the instalment rate. The 5% GDP adjustment for 2026-27 applies to the instalment amount option, not to the rate.
How is my instalment rate worked out?
Notional tax divided by instalment income, expressed as a percentage. It is an average rate rather than your marginal bracket, which is why it looks lower than the top rate you pay. A sole trader on $80,000 of business profit pays about $16,120 in tax and Medicare levy on 2026-27 rates, an equivalent rate near 20.2%.
How much instalment income pulls me into PAYG instalments?
Crossing $4,000 of instalment income in a lodged return is one of the triggers that puts you into the system. Once you are in, the same figure becomes the base your quarterly payments are calculated on.

Sources

Related calculators

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PAYG Instalment Calculator

What your instalment income produces each quarter

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BAS Calculator

Where instalment income is reported on the statement

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Sole Trader Tax Calculator

Tax on business profit for the year

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The paygcalculator.au team
Australian PAYG and tax research

We build the calculators and write the guides on PAYG Calculator Australia. Every rate, threshold and due date is checked against current ATO source material and carries the financial year it applies to. Figures in worked examples are computed by the same tax engine that runs the calculators, so the numbers you read match the numbers you get. Corrections to hello@paygcalculator.au.

Published: 7 July 2026 · Updated: 7 August 2026