PAYG Cash vs Accrual: What’s the ATO Expecting?

Understanding the expectations of the Australian Taxation Office (ATO) regarding Pay As You Go (PAYG) instalments under cash and accrual accounting methods i...

09/12/2025 • 9 min read

Topic: PAYG cash vs accrual — what’s the ATO expecting?

Last reviewed: 09/12/2025

Focus: Accounting Practice Analysis

PAYG Cash vs Accrual: What’s the ATO Expecting?

Understanding the expectations of the Australian Taxation Office (ATO) regarding Pay As You Go (PAYG) instalments under cash and accrual accounting methods is crucial for compliance. The ATO allows businesses to choose between cash and accruals accounting to calculate PAYG instalments, with specific guidelines governing each method. The choice impacts how income is reported and taxes calculated, affecting cash flow and tax obligations.

Featured Answer: The ATO expects businesses to choose between cash or accrual methods for PAYG instalments based on their accounting practices and business needs. Cash method is suitable for businesses that recognize income when received and expenses when paid, while the accrual method applies to those recognizing income when earned and expenses when incurred.

What is the Difference Between Cash and Accrual for PAYG?

The primary difference between cash and accrual accounting for PAYG instalments lies in the timing of when income and expenses are recognized. Under the cash method, you report income when you receive it and expenses when you pay them. Conversely, the accrual method requires you to report income when it is earned and expenses when they are incurred, regardless of when the cash transactions occur.

How Does the ATO Define Cash and Accrual Methods?

According to the ATO, the cash method aligns with businesses that have a turnover of less than $10 million and prefer simplicity in tracking income and expenses. The accrual method, detailed in [ATO's Taxation Ruling TR 98/1](https://www.ato.gov.au), is often used by larger businesses or those needing a more detailed financial overview. This method is generally required for businesses with a turnover exceeding $10 million.

When Should a Business Choose Cash or Accrual for PAYG?

Choosing between cash and accrual for PAYG instalments depends on several factors, including business size, revenue, and financial management preferences. Small businesses often choose the cash method for its simplicity and ease of cash flow management. Larger businesses with more complex transactions may prefer the accrual method for a comprehensive financial picture.

Example: A small consultancy firm with fluctuating income might benefit from the cash method to better manage cash flow. In contrast, a manufacturing company dealing with inventory and long-term contracts might find the accrual method more accurate for financial reporting.

What Are the ATO's Requirements for Reporting PAYG Instalments?

The ATO requires businesses to report PAYG instalments quarterly or annually, depending on their circumstances. Businesses must lodge an instalment notice using the Business Activity Statement (BAS). The choice between cash and accrual affects how businesses calculate their instalment income, which is crucial in determining the amount payable.

According to [ATO guidelines](https://www.ato.gov.au), accurate record-keeping is essential. The method selected must be consistently applied, and any changes must be justified and communicated to the ATO.

What Are the Implications of Choosing Cash vs Accrual for PAYG?

Choosing the cash method can simplify tax reporting and improve cash flow management, but it may not reflect the true financial position if income and expenses are deferred. The accrual method provides a more accurate financial picture, aiding in strategic business decisions, but requires more complex record-keeping.

Real-World Scenario: A retail business using cash accounting might report lower income in a slow sales period, reducing PAYG instalments. However, this could lead to a substantial tax bill if sales increase suddenly, impacting cash flow unexpectedly.

Frequently Asked Questions

Q: Can a business switch from cash to accrual accounting for PAYG?

Yes, businesses can switch from cash to accrual accounting for PAYG instalments, but they must notify the ATO and ensure compliance with all reporting requirements.

Q: How do I determine which method is best for my business?

Consider your business size, complexity, cash flow, and financial reporting needs. Consulting with an accounting professional can provide tailored advice.

Q: What happens if I incorrectly report PAYG using the wrong method?

Incorrect reporting can result in penalties and interest charges. Prompt correction and communication with the ATO are advised.

Next Steps: How Fedix Can Help

For Australian accounting practices seeking to streamline PAYG reporting, Fedix offers AI-powered solutions through MyLedger. Our platform supports both cash and accrual accounting methods, ensuring compliance with ATO requirements and simplifying the reporting process. Learn more about how MyLedger can optimize your financial management and improve efficiency.

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For more detailed guidance and to explore how MyLedger can transform your accounting processes, visit [Fedix](https://home.fedix.ai) today.