PAYG-I vs PAYG-W: get this right first
PAYG instalments (PAYG-I, field 5A)
- Prepayment of your own income tax
- Balance sheet: asset (prepayment) or against a tax provision
- Never an expense in the profit and loss
- Cleared when the notice of assessment credits it
PAYG withholding (PAYG-W, field 4)
- Employees' tax you are holding on their behalf
- Liability account, built up each pay run
- Cleared when you remit on the activity statement
- Also never an expense; the gross wage already was
Coding an instalment to an expense account is the classic error: it understates profit and then overstates it when the accountant reverses the entry at year end. If you are unsure what your quarterly figure should even be, the PAYG instalment calculator gives you the number to check the notice against.
Recording in Xero
- Run the Activity Statement
In the Reporting menu, select All reports, then open the Activity Statement.
- Create the draft bill on lodgment
Click Lodge & create draft bill (or Finalise & create draft bill if not connected to the ATO). Xero creates a bill that splits the liability line by line.
- Check the account on each line
GST and PAYG withholding allocate automatically to the system GST and PAYG accounts from your payroll settings. The PAYG instalment line does not auto-allocate: Xero requires you to enter the account for it yourself. Point it at your income tax prepayment or provision account.
- Keep interest and penalties separate
Any general interest charge or penalty goes on its own line to its own account, never into the GST or PAYG accounts.
- Approve and reconcile
Approve the bill, then match the bank payment with find & match. A spend money transaction works as the lighter alternative when you skip the bill.
Recording in MYOB
- Go to Banking, then Spend money
In MYOB Business it is the Banking menu > Spend money; in AccountRight, the Banking command centre > Spend Money. Choose the bank account the payment left from, with amounts set to tax inclusive and the N-T tax code on the allocation lines.
- One line per BAS field
Copy the fields off the completed statement: PAYG withholding (field 4) to its 2-XXXX liability account, and the PAYG instalment (field 5A) to the instalment account. MYOB's own guidance describes 5A as "the prepayment of PAYG" and illustrates it against a 1-XXXX asset account (or an equity account in some setups), not an expense.
- Round separately
The BAS reports whole dollars, so add a small adjustments and rounding line rather than forcing a field to balance.
- Refunds mirror the entry
An ATO refund is a Receive money transaction with the same lines and the signs reversed.
The accounting treatment behind both
For a sole trader, income tax is personal, not a business cost, so instalments paid from the business account are really drawings or a personal prepayment; many bookkeepers use an equity account for exactly that reason. For a company, instalments accumulate as a debit against the income tax provision, and the year-end tax expense entry trues the provision up to the assessed figure. Either way the instalment meets its match at assessment, when the credit lands, as explained in the PAYG instalments guide. Payment timing for the underlying quarters follows the standard PAYG due dates.
Frequently asked questions
How do I record a PAYG instalment in Xero?
How do I record a PAYG instalment in MYOB?
Is a PAYG instalment an expense?
What account should PAYG withholding go to?
Where do GIC or late fees go?
Sources
- Xero Central: Account for payments to or refunds from the ATO
- MYOB: Recording ATO payments and credits
- ATO: PAYG instalments overview
Related resources
PAYG Instalment Calculator
Check the notice before you book it
Open →PAYG Instalments
How the quarterly prepayments work
Open →PAYG Due Dates
When each recorded quarter falls due
Open →
Narelle Hartigan is a CPA-qualified tax accountant with over a decade of experience in Australian personal taxation and payroll. She founded PAYG Calculator Australia to make tax withholding easy for every Australian worker to understand.