What Does PAYG Mean in Australia
We often get asked about PAYG and how that affects a business. But simply put, ‘PAYG’ stands for ‘Pay As You Go’. It is an acronym used for two different processes systemised by the Australian Tax Office (ATO) for businesses in Australia: PAYG instalments and PAYG withholding.
Benefits of PAYG
The PAYG tax system allows employers to vary the amount of tax that is withheld from employees on each payment instalment, withholding some of this to anticipate the end of year tax liability. Rather than pay a large tax bill at EOFY, the instalments are spread out over the course of the year making it easier to meet taxation obligations.
This system allows you and your business to meet your income tax obligations by making payments at the end of each quarter of the year. These quarterly payments go towards the expected income tax obligation accumulated from your business and investment income for the current financial year. The ATO will write to you should you need to make these payments. But generally, it will apply to individuals, organisations or trusts who earn a certain amount of individual, gross business or investment outcome.
It is important to note however, that there are special rules and exceptions that apply to PAYG instalments for different business and company structures, trusts, primary producers and consolidated groups. For instance, if you are a company or super fund, you will need to complete PAYG instalments if the ATO calculates an instalment rate of above zero for your GST-registered organisations. For more on these special requirements, you can check out our other quick guide here.
Pay As You Go (PAYG) withholding is a system of withholding income tax from an employee or contractor’s salary or wages. The payer of the income therefore, rather than the recipient of the income, pays the tax directly to the ATO on behalf of the employee or contractor. These payments are made based on your expected income level for the year and will be taken into account when assessing your tax at EOFY.
Do I have to use PAYG Withholding?
You are obligated to withhold tax if your business:
- Has employees.
- Has other workers (including contractors) where it is voluntarily agreed that you will withhold amounts from your payments to them.
- Makes payments to businesses that do not quote their Australian Business Number (ABN).
You will need to register your business by the day you are required to start withholding amounts, which is simple to do online or by phone for ABN registered business.
Additionally, registration with the system is required it you make payments to businesses that do not quote their Australian Business Number (ABN) or have employees.
If your employee or contractor earns under the tax-free threshold, they can make a claim against the amount withheld by your business at the end of the financial year through their individual tax return.
Register for PAYG Withholding
You must register for PAYG withholding if you are required to withhold tax from payments to workers or other businesses. You will need to register through the Australian Business Register on the ATO website before you need to withhold your first payment. If you have an ABN already, you can use the ATO’s Business Portal to register.
Exceptions to PAYG Withholding Obligations
You may be exempt from withholding income if your business is a sole trader or partnership structure and you draw amounts from the business. As this is not considered a wage, these drawings are not subject to PAYG withholding. Instead, these are provisions for your income tax liability for your business through PAYG Instalments.
If your employee or contractor earns under the tax-free threshold, you are not required to exclude them from PAYG withholding. Instead, they can make a claim against the amount withheld by your business at the end of the financial year through their individual tax return.
DISCLAIMER: The above information is general in nature and must be tailored to your personal circumstances. The information is provided as a guide only.