My business is down on last year — can I lower my PAYG instalments without being charged interest?

The instalment notice arrives and the number on it has nothing to do with how this year is going. It is worked out from your last assessment — the year you had, not the year you are having.

For a business that has gone backwards, that means prepaying tax on a profit it is not making, getting the excess back only after the return is lodged, and funding the gap in between. The obvious move is to vary the instalment down. What makes people hesitate is the interest charge sitting behind that button.

What varying does, and where the line sits

Start with what a variation is not. PAYG instalments are prepayments of the income tax you will owe anyway; varying them changes the timing, not the total. Pay too much across the year and the excess is refunded after you lodge. Pay too little and you pay the shortfall then.

The line is drawn after the return comes in. The ATO compares the instalments you actually paid against the tax payable on your instalment income for the year. If your varied instalments come to less than 85% of that figure, general interest charge can be applied to the difference on top of the shortfall, and depending on the circumstances there may be penalties as well. The ATO's own position on its guidance page, updated 23 June 2026, is blunt: if you are not sure, it is better not to vary, because anything overpaid comes back to you anyway.

There is an exception that matters more than most people realise. Where you have taken reasonable care in estimating your end-of-year liability — a genuine attempt, judged by what a reasonable person in your circumstances would have done — penalties and interest are not applied to the variation. Reasonable care is the hinge in the current rules, and it is the hinge in what is coming next.

What changes from 1 July 2027

In the 2026–27 Federal Budget on 12 May 2026 the Government announced Dynamic PAYG instalments. From 1 July 2027, a business will be able to opt into an ATO-approved calculation built into accounting software it may already be using, which draws on current figures so instalments track this year's performance rather than last year's assessment.

Two other pieces were announced at the same time. Businesses will be able to choose to report and pay PAYG instalments monthly, and taxpayers with a history of non-compliance will be required to do so. The ATO's page on the measure, published 12 May 2026, notes that none of this is law yet. Through 2026–27 the ATO is running pilots and working with software providers.

The part that closes today

Draft Practical Compliance Guideline PCG 2026/D3 sets out how the interest charge will be administered for anyone using the new method. Comments close today, 28 August 2026. When finalised, the draft proposes to apply from 1 July 2026, which covers the pilot, ahead of the wider opt-in from July 2027.

It works as a safe harbour with four risk zones. White: you used the method, met its conditions, and your instalment amount or rate is at or above 85% of the Commissioner's benchmark — the Commissioner will not apply compliance resources to impose and collect the interest charge. Green: same, except you landed below 85% and the ATO is satisfied you took reasonable care with your inputs — again no interest charge, though the ATO may ask why the outcome occurred. Yellow: conditions not met, below 85%, and reasonable care not taken. Red: the method used in a way that undermines the collection of tax — inputs manipulated away from your actual financial position, or a variation dressed up as the method when it was worked out some other way.

The draft's own example is the useful one. A small company whose sales have fallen uses the method, relies on up-to-date figures, and lands below the 85% benchmark. That is the green zone, not a problem — because the low number is what the business actually looks like.

The conditions are the whole thing

The safe harbour only exists if all of the following hold. Once you start using the method during an income year you have to keep using it for the rest of that year; stop partway and the guideline no longer covers you. You keep evidence of the inputs, your use of the method and its outputs. You complete every activity statement label required to vary, and use the exact figures the method produces rather than a rounder number you prefer. You pay the amount it produces. And your past lodgments — income tax returns and activity statements — and your payments have to be up to date.

That last condition does most of the work. A business sitting on an unlodged BAS or an old balance does not get the safe harbour, however good its software is.

Two things already being got wrong

The first is treating a variation as a way to keep the cash. It is not — it moves the payment, not the liability, and the draft puts instalments repeatedly reduced to nil or varied heavily downwards, where a real tax bill then shows up at year end, squarely in the red zone.

The second is assuming the software carries the responsibility. It does not. The guideline turns on the care you take with the inputs: data reconciled to source records such as invoices, bank statements and payroll; figures that are complete and current; records retained; and asking a tax professional when you are unsure how the method applies. The calculation is the ATO's, but the numbers going into it are still yours.

This is general information current as at 28 August 2026, not advice about your own instalments. Nothing here changes the notice sitting on your desk this quarter — the existing rules, including the 85% line, are what apply now.

Two things are worth doing in the meantime, and neither requires a decision about the new method. If this year is genuinely below last year, a variation is already available and stands or falls on whether you can show a genuine estimate behind it. And if you want the option of the dynamic method when it opens, the qualifier is a clean lodgment and payment history — built over quarters, not in the week you sign up. To see how a change in profit moves your tax position, the income tax calculator on this site is the quick version; the quarterly work itself is what our services for sole traders and for companies, trusts and bookkeeping are for.