Pay As You Go (PAYG) tax is comprised of two components, PAYG withholding and PAYG instalments. PAYG withholding is an employer’s legal obligation to withhold amounts from payments made to employees for income tax purposes, while PAYG instalments is a system for paying amounts towards your expected end of year income tax. The actual income tax amount due is calculated when a tax return is lodged. The benefit of paying PAYG tax on a monthly or quarterly basis is that it is much easier to stay in control of your money and tax returns. If calculated correctly, at the end of the year, your tax debt or refund shouldn’t be a very large figure.
As an employer, you must register for PAYG withholding, whereas the ATO will notify you if your business must pay PAYG instalments. Before you can withhold any part payments for PAYG purposes you must register with the ATO. Registration must be done by the time you first withhold from a payment.
When hiring a new employee, it is important to be aware that you must receive their TFN declaration form within 28 days of the employee starting work. If employed by more than one person, the employee must have lodged separate TFN declarations with each. After the 28 days, if the declaration has still not been received, then you must take 46.5% out of the employee’s earnings for tax withholding. For every employee that acquires payments under the PAYG withholding system, a payment summary must be completed.
PAYG withholding is an obligation by law. Although, employees are given the option to have different deductions made, e.g. voluntary superannuation contributions and donations to charities. As an employer you must withhold an amount from the payments you make to the following:
• your own employees
• employees of another business that you pay
• company directors for their services (if you operate your business as a company)
• some ‘other’ types of workers such as contractors
• a business you have paid that has not provided their ABN to you on an invoice or other document (if required)
Under the PAYG withholding system, if you make payments subject to withholding you must:
• register for PAYG withholding
• work out the status of your workers (if applicable)
• become familiar with the types of payments you need to withhold from
• work out the amount to withhold
• report and pay withheld amounts to the ATO
• provide payment summaries and lodge an annual report after the end of each income year.
In most circumstances you will need to withhold amounts from the following payments:
• where labour hire arrangements are made
• where the payee has elected voluntary amounts to be deducted
• if an ABN hasn’t been quoted
The PAYG instalment system is used for paying instalments during the income year, which go towards your expected income tax liability on your business and investment income. Your instalments for the year are credited against your income tax assessment at the end of the year to determine whether you owe more tax or are owed a refund.
The instalment amounts you will be required to pay each period are calculated by the ATO. These amounts are based on your latest income tax assessment. If you lodge a new tax return or amend your latest return, these amounts may be different to the amounts printed on your activity statement. How much you will actually have to pay will also depend on how often you pay instalments, this can be either quarterly or twice a year.
Reporting PAYG tax is done via your activity statement. When it comes to termination payments, you need only report them if the sum paid is in cash, and greater than $5000. It is important to report accurate information and figures to the ATO in order to avoid penalties and confusion.
The world of tax can be extremely complex and if obligations are not adhered to it can often become quite stressful, not to mention costly. The accountants, lawyers and tax agents at The Quinn Group are able to assist you with all tax and ATO related matters. For advice or more information submit an online enquiry or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to book an appointment.