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Australian Pay As You Go (PAYG) Tax: What You Need to Know

The Australian taxation office has a couple of methods that aim to make tax time easier for taxpayers, and one of the most popular of them all is the PAYG system. It stands for Pay As You Go, and there are two kinds of it – PAYG withholding and PAYG instalments.

This system eliminates the worry of completing the end-of-year tax return before the due date. Here is how the Pay As You Go system works.

What is PAY As You Go (PAYG)?

It is a system where the ATO allows an individual to pay a portion of the future liability in advance, which ends up reducing the amount owed to the ATO by the EOFY (End Of Financial year). It is a great option to help businesses manage their cash flow a little better.

PAYG

Here are the two types:

PAYG withholding

PAYG withholding or PAYG-W is a system that allows employers to make pre-payment on behalf of the employees for their income tax obligations. PAYG withholding helps employees avoid facing a large tax bill by the end of the financial year.

As an employer, if you know how PAYG withholding obligations operate, you and your employees will have it easy to meet the tax requirements.

PAYG Instalments

PAYG instalments or PAYG-I is a system that allows pre-payment for businesses for their own corporate income tax obligations. This system will help your business pay income tax at the end of each quarter. All of your quarterly earnings are included in this payment.

The ATO will send an e-mail to you if this payment is requested. Usually, this applies to individuals, businesses or trusts who earn as an individual, gross business or investment.

What’s the difference?

The major difference between the two kinds is that the PAYG withholding is the pre-payment on behalf of employees, whereas the PAYG instalment is the pre-payment on behalf of the business.

Overall, the PAYG tax system allows employers to reduce their employee’s tax obligations for each payment by withholding some of the tax liability for the end of the tax year. Instead of paying EOY taxes in full at once, the monthly instalments are spread throughout the entire year to make tax compliance easier.

Do you have to use Pay As You Go (PAYG) withholding?

You will have to withhold tax if you have a business that:

  • Has employees.
  • Has Workers (and contractors) who have willingly agreed that you will withhold some amounts from the payments they receive from you.
  • Make payments to other businesses that don’t quote their ABN (Australian Business Number).

Your business must register for PAYG withholding by the day you start withholding amounts. Registering for it is pretty simple to do. You can register for PAYG withholding online, or you can do it by phone if your business is ABN registered. You can use the ATO’s Business portal or reach out to a registered tax agent or BAS agent.

For the employees or contractors earning less than the tax-free threshold, the Pay As You Go system lets them make a claim against the withheld amount at the end of the financial year EOFY through their individual tax returns.

Payments you need to withhold from

The PAYG withholding is a system of withholding amounts of a payment that businesses may make. The amount withheld on accounts of the payroll tax is sent to the Australian Taxation Office (ATO).

payment

So if you are wondering what kind of payments you have to withhold, here’s the answer:

  • Payments made to the employees
  • Payments made to the directors
  • Payment made to a business that does not quote the ABN to you
  • Payment made to the contractor who has a voluntary agreement with you

You, as an employer, withhold these types of payments. There are a couple of exceptions, which we are discussing next.

Exceptions to PAYG withholding obligations

Exemptions are nothing new, as they exist everywhere. So what are the conditions that may exempt you from withholding income?

You may be exempt from it if the business you run is a partnership structure or sole trader, and you draw an amount from it. Since such drawings are not considered wages, these aren’t subject to PAYG withholding.

If your contractor or employee earns less than the tax-free threshold, you aren’t required to exclude them from the Pay As You Go withholding. However, they can make a claim against this amount, just as stated above.

PAYG Instalments – How to start

There are two ways to start PAYG instalments, Automatic entry and Voluntary entry.

payg instalments

Automatic entry

If your income is already over the threshold when lodging the income tax return, the Australian Taxation Office will automatically put you in the system. They will also tell you the options to calculate your instalments and how often you must lodge and pay.

Similarly, when you no longer meet the threshold, the ATO will remove you from the system automatically.

Voluntary entry

You can always enter this system voluntarily to reduce the chances of paying a large tax bill. You can ask to enter this system:

  • by phoning the ATO on 13 28 66
  • online through myGov (for a sole trader)
  • through a registered tax agent or business activity statement (BAS) agent.

Reporting for PAYG instalments

The reporting method will depend on whether you have registered for GST.

  • If registered for goods and services tax, you have to report PAYG instalments on your business activity statement (BAS)
  • If you aren’t registered for it, you have to report on an IAS or instalment activity statement.

The ATO will automatically send you one of these two at the end of each instalment period.

In case you still have any doubts, reach out to Clear Tax accountants, who can analyse your situation much better and give you the needed advice.

Disclaimer: The information on this website is for general purposes only and should not be relied upon for making legal or other decisions. The advice provided in this article is general in nature and is not subject to the personal financial situation and needs of any individual. Clear Tax tries to keep the information accurate and up-to-date; however, you should bear in mind with changing circumstances, the accuracy and reliability of the information will not necessarily remain the same. The information is by no means a substitute for financial advice.