Retired but receiving a tax notice? PAYG Instalments explained
- Damon Tuthill
- Jul 22
- 3 min read
You have retired, you are no longer earning a salary, and then a letter arrives from the Australian Taxation Office (ATO) asking you to start making tax payments through the year.
If this has happened to you, do not worry. It is normal, and it is a standard part of the tax system once your income changes in retirement.
Below is a simple explanation of what a PAYG instalment notice means, why you are receiving one, and what to do if the amount does not look right.
What are PAYG instalments?
PAYG (Pay As You Go) instalments are regular prepayments towards the tax you expect to owe on your business and investment income for the year.
Instead of paying one large amount after you lodge your tax return, the ATO asks you to pay in smaller amounts, usually every quarter. When you lodge your return, the instalments you have already paid are credited against your tax bill. Any excess is refunded.
Why am I getting a PAYG instalment notice after retiring?
When you were working, your employer took tax out of your salary before you were paid. Your tax was handled automatically.
In retirement, that changes:
Your salary stops
Your investment income continues, such as dividends, distributions and interest
No one withholds tax from that investment income
So the ATO asks you to pay tax on that income as you go. The ATO may enter you into the PAYG instalments system automatically based on your last tax return.
How PAYG instalments work in retirement
If you receive a PAYG instalment notice:
You will make regular payments, usually each quarter
The amount is based on your most recent tax return
You are prepaying your tax. It is not an extra tax
What if the PAYG instalment amount does not look right?
The ATO bases your instalments on past information, so the amount may not match your current situation.
This can happen if:
your investment income has dropped
you have changed your investments
last year's income was unusually high.
If any of these apply, you can ask to change the amount. The ATO calls this varying your instalments.
How to vary your PAYG instalments
Log in to your ATO account through myGov (or ask your accountant to do this for you)
Open your PAYG instalment notice or activity statement
Select the option to vary the instalment
Enter a new estimate based on the income you expect this year
Submit it before the due date
You can also choose to pay instalments based on your actual income each quarter, instead of a fixed amount.
Before you vary: the 85 per cent rule
Lowering your instalments can free up cash flow, but there is a limit to how far you can safely go.
If your varied instalments turn out to be significantly less than your actual tax for the year, generally a shortfall of 15 per cent or more, the ATO may charge interest on the difference.
Any variation should be based on a reasonable estimate of your income, not just a guess. If in doubt, it is safer to leave the instalments as they are, because any overpayment is refunded after you lodge your return.
Key takeaway: PAYG instalments after retirement are normal
If you receive a PAYG instalment notice after retiring:
It is normal
It happens because your investment income continues after your salary stops
It simply spreads your tax payments across the year
And if you are no longer earning business or investment income at all, you may be able to exit the PAYG instalments system entirely.
How we can help
Not sure if your instalment amount is right for your situation? We can review it with you and work out whether a variation makes sense. Book a financial review
Sources
Aspire2 Wealth Advisers Pty Ltd ABN 42 125 897 903 is an authorised representative and credit representative of Charter Financial Planning Limited ABN 35 002 976 294, AFSL and Australian Credit Licence No. 234665. This website contains information that is general in nature. It does not take into account the objectives, financial situation, or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
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