PAYG is the method by which tax is collected at the source of the payment. The main benefit of this system is that it allows people to pay tax progressively, so they do not end up with a lump sum payable at year end. These payments normally form part of the recipient’s taxable income.
PAYG is reported using activity statements, either Business Activity Statements (BAS) or Instalment Activity Statements (IAS). A BAS is used when a taxpayer is registered for GST as well.
There are two types of PAYG withholding:
- PAYG Withholding System (PAYGW) is the system for paying tax that you have withheld from others.
- PAYG Instalments System (PAYGI) is the system by which you pay your own tax and is applicable to a number of different types of taxpayers.
PAYG Withholding (PAYGW)
Common payments where PAYG is withheld are:
- Salaries, wages, allowances, commissions, and bonuses paid to an employee
- Payments to a company director
- Payments to an officeholder
- Return to work payments to individuals
- Payments made under a voluntary agreement between the payer and payee
- Payments made under a labour-hire agreement
- Social welfare payments
- Payment of a pension or annuity
- Compensation payments for injury or illness
- Employment Termination Payments
- Payment for unused annual leave
- Payments to a business where no ABN has been quoted.
Employee -V- Contractor
PAYG Withholdings cannot be circumvented by treating a person as if they were a contractor and have them quote an ABN.
The ATO outlines key areas to consider when deciding whether the nature of the arrangement is an employer/employee or contractor. These are listed below:
- Control over work: An employee works in the employer’s business and has an implied obligation to undertake duties as directed by their employer. On the other hand, a contractor will be contracted to perform a specific duty or outcome and are in control (subject to contract conditions) as to how that is done.
- Independence: An employee performs work in accordance with an employment contract, whereas a contractor provides the service as per the contract, and further services are only by agreement.
- Payment: An employee is often paid on the amount of time worked, whereas a contractor is usually paid on the performance of the contract services.
- Commercial Risks: An employee generally bears no commercial risk in undertaking their job. They work for an employer who is legally responsible for the work of the employee. A contractor assumes legal responsibility for their work. They can either profit or loss from a contract and are liable to fix defects at their own cost.
- Ability to Delegate: An employee usually performs the work personally and does not have the ability to delegate their duties to others. A contractor (unless specified in the contract) can delegate to others or subcontract the work.
- Tools of Trade: In most cases, an employee will be provided with all the necessary tools of trade to complete their tasks. A contractor would normally provide their own tools of trade.
These are three-way agreements whereby a labour hire company pays a worker who carries out work for a client.
The worker is not deemed to be an employee of either the labour-hire company or the client.
Provided the labour-hire company quotes an ABN, the client is not required to withhold PAYG; however, the labour-hire firm is required to deduct PAYG from payments made to the worker.
This covers arrangements between an entity and an individual where the PAYG system does not otherwise cover them. For this arrangement to exist, the following is required:
- The worker must be an individual and have an ABN.
- Each party must complete the approved form from the ATO stating that payments made under the arrangement are subject to the voluntary agreement.
- Each party must keep a copy of the agreement for a period of five years after the final payment under which the agreement has been made.
- Either party may end the agreement by notifying the other party in writing.
The withholding rate is a flat 20 per cent or the rate notified by the ATO on the payee’s instalment notice (whichever is the higher). If the payee’s instalment notice rate is lower than 20 per cent, then that rate can be used provided the payer and payee agree.
PAYG is withheld at normal rates from most allowances paid to employees. Some common areas where it is not required to be withheld are:
- Cents per kilometre motor vehicle allowances to employees using the Tax Office rate of 72 cents per km up to 5,000 km of travel.
- Award transport payments for deductible transport expenses.
- Laundry allowances for deductible clothing up to the threshold amount of $150.
- Award overtime meal allowances up to reasonable allowances amount; and
- Domestic or overseas travel allowances for overnight (can be more than one night) travel up to the amount of the reasonable allowance.
How Much Do I Withhold?
Amounts withheld from employees (and other similar payments as mentioned above under “Common payments where PAYG is withheld”) are published by the ATO and available in a downloadable calculator or tables (www.ato.gov.au).
Care must be taken to ensure that additional amounts that may be needed to be withheld are taken into account given the employees’ circumstances, for example, HELP debts, residency status, second job, family benefits.
These scales can only be used if the employee has filled out a Tax File Number Declaration on commencement of their employment. If no tax file number is quoted, then an amount of 47 per cent is withheld. Also noted on the Tax File Number Declaration are other particulars which may affect the amount of tax withheld (as noted above, HELP etc.)
An employee may apply to have the amount of PAYG withheld varied if they believe their circumstances would allow for a lesser amount of tax being paid out of their regular pay packet (for example, rental property losses). The ATO will notify the employer directly of the new rate for withholding.
ABN Not Quoted
Where a supplier fails to quote an ABN in respect to a supply made for over $75, the payer is required to withhold at 47 per cent.
PAYG withholding is not required where:
- The payer accepts the supplier’s ABN in good faith, and it later turns out the supplier’s ABN was false.
- The payer is an individual, and the supply is a domestic or private matter.
- The payee is an individual and makes a written statement to the payer that the supply was made in a private or domestic manner or the pursuit of a recreational interest or hobby.
- The payee is exempt from income tax.
- The payee is performing contract work and is under 18 years of age, and payment does not exceed $350 per week.
REMOVAL OF TAX DEDUCTIBILITY FOR NON-COMPLIANT PAYMENTS
A business that has not withheld PAYG from a payment of employee remuneration or to a contractor that has not quoted an ABN when required will not be entitled to claim an income tax deduction for the payment. This measure has applied since 1 July 2019.
In addition to the existing regime already imposing an administrative penalty for failure to withhold when required under the PAYG system, this appears intended as a financial deterrent. However, as acknowledged by the Black Economic Taskforce Report, it required the non-withholding to be detected and for phoenix-type activity to be thwarted to recover tax shortfalls.
Payers using non-cash benefits such as goods and services as remuneration for services are required to deduct an amount of PAYG equal to that as if the goods and services were paid in cash.
Payer Obligations under PAYG
Once a payment is deemed to be included under the PAYG system, the ATO places certain obligations on the payer, who must:
- Register as a PAYG withholding payer with the ATO.
- Withhold an amount from the payment at the required rate.
- Notify in the prescribed format to the ATO the amount withheld AND make payment by the due date.
- Report to the ATO and the recipient the amount of the payment and the amount withheld. In the case of an employee,
this would be the annual PAYG payment summary (non-business), previously known as a group certificate.
- Single Touch Payroll (STP) has been obligatory since 1.7.2018.
WITHHOLDING FROM CLOSELY HELD TRUSTS
The TFN withholding arrangement also extends to closely held trusts, including family trusts.
The withholding rules apply, where the trustee of a resident trust estate, being a closely held trust, makes a distribution to a beneficiary during the income year, and some or all of the distribution is from the ordinary or statutory income of the trust. The beneficiary must be an Australian resident, not an exempt entity and not under a legal disability.
The trustee must withhold an amount from the distribution if the following conditions are met:
- – The beneficiary did not quote a tax file number to the trustee before the distribution time
- – The trustee is not liable to pay tax in connection with the distribution
- – The trustee is not required to make a correct trustee beneficiary statement in connection with the distribution; and
- – Family trust distribution tax is not payable in connection with the distribution.
Similar rules apply if the beneficiary becomes presently entitled to a share of the trust’s net income. The TFN withholding rate on the distribution or present entitlement is usually 47%.
PAYMENTS TO FAMILY, DIRECTORS OR TRUST BENEFICIARIES
The ATO has advised that from 1 July 2021, employers must report any closely held payees through Single Touch Payroll (STP). A closely held payee is someone directly related to the entity they receive payments from, including:
- Family members of a family business
- Directors or shareholders of a company
- Beneficiaries of a trust
You should already be reporting any other payees through STP. Employers who haven’t started reporting through STP and don’t have a deferral or exemption in place need to start reporting now.
The ATO will issue penalties if Single Touch Payroll (STP) is not used.
PAYG InstalmentS (PAYGI)
- Partners in a partnership
- Beneficiaries of a trust
- Trustees of trusts
- Superannuation funds
- Other entities that are taxed like companies.
aTO Advised Instalment Amount
Individuals, companies, and superannuation funds with an annual turnover of less than $2 million are eligible to pay a quarterly instalment as advised by the ATO instead of calculating the amount based on an instalment rate advised by the ATO.
This amount will be pre-printed on your statement for that period, and the election to adopt this method is made on the first activity statement of the financial year. The instalment amount is calculated based on your prior year’s tax (excluding capital gains).
If you consider your instalments too high due to a change in income in the current year, they can be varied. Once you have estimated your benchmark tax for the current year (tax payable excluding capital gains), you can estimate your revised quarterly instalment amount. Care must be taken; however, if your estimation is less than 85 per cent of your actual tax for the year, you will be liable for interest on the underpayment and may also be fined.
ATO Advised Instalment Rates
If you are not eligible or elected not to pay an instalment amount, the ATO will advise you of an instalment rate on your BAS.
This rate is multiplied by your instalment income for the period to give your payment amount.
Instalment income includes:
- Gross sales or fees received (ex. GST)
- Dividends (excluding imputation credits)
- Rental income
- Distributions from trusts & partnerships
Instalment income does not include:
- Salary and wages
- Income where PAYG has otherwise been withheld
- Exempt income
- Capital gains (unless you are a superannuation fund)
- Imputation credits.
Partnership Instalment Income
A different method applies to the calculation of instalment income if you are a partner in a partnership. Firstly, you must calculate your share of gross income for the last year in which you received an assessment.
For example, The annual instalment income of a partnership for the previous year was $200,000, and your share of the profit was $50,000. To calculate your instalment rate, you take $50,000 and divide it by $200,000, which gives 25 per cent. This rate is then multiplied by the current quarter instalment income for the partnership to calculate your individual instalment income for this quarter.
If the partnership was in a loss situation in the prior year and will be profitable this year, you are expected to calculate your instalment income reasonably. If there is a restructuring of the partnership and a partner is added or leaves, similar reasonable estimates need to be made.
Trust Instalment Income
The type of trust you are receiving income from impacts how instalment income is calculated.
Discretionary AND Family Trusts
Calculation of instalment income uses the same method as for partnerships (see previous.)
Broadly held resident INVESTMENT unit trusts
These trusts are resident trusts that have central management control and are offered to the public and are publicly listed.
Typical examples of these are managed funds operated by large managers such as AMP. Where you are the beneficiary of this type of trust, include ALL amounts, including capital amounts and items that may relate to a past or future year, distributed to you as instalment income for the period.
Corporate unit trusts and public trading trusts
These trusts are taxed as though they were companies. If you are the beneficiary of this trust, you include only the cash distribution as your instalment income.
Absolutely entitled trusts
In these trusts, the trustee’s only duty is to administer the trust property and income as the beneficiaries direct. These beneficiaries include as instalment income their portion of income for the relevant period.
Instalment Income – Superannuation Funds
Instalment income of a superannuation fund would include:
- Taxable contributions
- Distributions received
- Net capital gains
- Foreign income.
Instalment Income – Cash or Accruals?
Generally, a taxpayer is required to account for their instalment income on the same basis as which they lodge their income tax returns.
CHANGES TO PAYG INSTALMENTS THRESHOLD
From 1 July 2014, PAYG instalment thresholds increased, which may mean you no longer need to pay instalments.
The entry and exit thresholds for:
- Business or investment income increased from $2,000 to $4,000
- Adjusted balance of assessment increased from $500 to $1,000
- Notional tax increased from $250 to $500
If you no longer meet the entry and exit rules, you will be automatically exited from the PAYG instalment system. However, you can continue to pay instalments towards the end of your tax liability if you voluntarily re-enter the PAYG instalment system.
Activity Statements are used to report and remit payment for PAYG instalments and PAYG withholding (amongst other taxes).
These statements will take the form of a BAS (business activity statement) or IAS (instalment activity statement).
A BAS is used where an entity is registered for GST; an IAS is used for all other payers. If you registered for quarterly statements, your lodgement will be due on 28 October, February, April, and July. Concessional lodgement dates apply if you use a registered Tax or BAS Agent who lodges your BAS electronically.
If registered for monthly statements (either by choice or due to turnover and amounts withheld) your statements will be due by the 21st of each month following the period of activity.
The amount that a business withholds from its employees determines when they will have to report and remit payment to the ATO. If you withheld less than $25,000 from your employees in the previous year, you will be a quarterly payer with the aforementioned due dates. If your annual withholding is between $25,001 and $1 million, you will be a monthly PAYG payer with due dates, as mentioned previously.
If you are a large withholder (more than $1 million), you will be required to make payments electronically on a weekly basis to the ATO. Your date for payment depends upon the day withholding took place.
For example, Daisy Pty Ltd is a manufacturing company with an annual turnover of $850,000 and elects to lodge its BAS quarterly. Last year Daisy Pty Ltd withheld $100,000 from payments to employees for PAYG. As Daisy Pty Ltd exceeds the threshold and is deemed a medium withholder, it will have to complete monthly IAS’s. At the end of each quarter, it will only receive one statement, which will contain the GST and IAS details. Importantly, the GST amounts on this statement are for three months, whereas the PAYG withheld from wages is only for one month.
Some PAYG payers will be eligible to make annual payments. You qualify if:
- Your most recent notional tax as advised by the ATO was less than $8,000.
- You or your partnership (if you are in one) are registered for GST, and you report and pay GST annually.
- As a company, you are not part of any other instalment group or GST joint venture.
Payment for annual payers is due on 21 October.
Late Lodgement and/or Payment
The ATO enforces hefty fines and interest for statements and payments that are lodged late.
Fines for late or non-lodgement range from $222 to $5,550 depending on the size of the entity and can increase depending on how long the statement is overdue. These fines are not tax-deductible, and the penalty unit is currently $222.
Interest is usually charged where a payment is not paid on time. The General Interest Charge (GIC) is usually tax-deductible for business taxpayers.
GIC is charged on a daily compounding basis. Rates since the 2015 tax year are as follows:
GENERAL INTEREST CHARGE
QUARTERLY PERIOD RATE QUARTERLY PERIOD RATE
30 September 2014 9.69% 31 March 2018 8.72%
31 December 2014 9.63% 30 June 2018 8.77%
31 March 2015 9.75% 30 September 2018 8.96%
30 June 2015 9.36% 31 December 2018 8.96%
30 September 2015 9.15% 31 March 2019 8.94%
31 December 2015 9.14% 30 June 2019 8.96%
31 March 2016 9.22% 30 September 2019 8.54%
30 June 2016 9.28% 31 December 2019 7.98%
30 September 2016 9.01% 31 March 2020 7.91%
31 December 2016 8.76% 30 June 2020 7.89%
30 September 2020 7.10%
31 December 2020 7.01%
31 March 2021 7.02%
30 June 2021 7.01%
30 September 2021 7.04%
It is important to lodge and remit payment on time wherever possible. If not possible for a given lodgement, advise the ATO immediately. Often, they will not impose fines for late lodgement in genuine circumstances where a taxpayer has a good lodgement history.
ADDITIONAL METHOD FOR MONTHLY PAYG INSTALMENTS
If you pay your PAYG Instalments on a monthly basis, there is an additional simplified method for calculating your instalments that you may be entitled to use.
This method is designed to reduce the cost of calculating instalments on a monthly basis.
How to apply the additional method
If you choose to use the additional method, you will not need to calculate your actual instalment income every month. For the first two months of each instalment quarter, you can make a reasonable estimate of your instalment income and apply your instalment rate. In the third month of each quarter, you calculate the total instalment income for the quarter and subtract the estimates used in the first two months. The payment in the third month will be the balance remaining for the quarter, multiplied by your instalment rate.
Eligibility to apply the additional method
Anyone paying their PAYG instalments on a monthly basis can use this method, provided the Commissioner has not told them that they must calculate their actual instalment income each month.
There are some rules about how you can start to apply this method explained below.
New monthly instalment payers
If you are a new monthly payer, you can choose to use the additional method in either of the following months:
- The first month of the first instalment quarter in which you become a monthly payer.
- The first month of the second instalment quarter after you become a monthly payer.
This allows you to transition to the new measure and provides some flexibility, particularly if you begin paying monthly instalments part way through an instalment quarter.
Existing monthly payers
If you are already paying your instalments monthly, you will be able to choose to use the additional method at the start of each income year. The method must be applied from the first month of your income year.
If you choose to use the method in the first month of your income year, you must use the method for the remainder of the income year.
Electing to use the additional method
You do not need to notify the Commissioner formally. You should keep a record of your decision and how you applied the additional method to obtain your estimates from a particular reporting period.
What constitutes a reasonable estimate?
The Commissioner has not stipulated how you should calculate your instalment income estimate for a particular month.
However, suppose you use one third of the previous quarter’s actual instalment income as your estimated instalment income for the first and second months of the next quarter. In that case, the Commissioner will accept this as reasonable, provided you use it consistently within an income year.
Special rule if the instalment for the third month is negative
If the instalment for the third month of a quarter is negative when using the additional method, you cannot apply for a refund.
Instead, you will need to revise your instalment income from the previous month(s), starting with the most recent month first. You can do this by lodging a revised activity statement for the applicable month(s).
Leaving a consolidated group
You can use the additional method if you become a monthly payer from the beginning of the first month in a quarter after you leave a consolidated group. However, if you become a monthly payer from the beginning of the second month in a quarter, you must calculate your actual instalment income for the remainder of the quarter. In this case, you can start to use the additional method to calculate your instalment income from the beginning of the next quarter.
Varying your instalment rate
The additional method does not change the rules regarding variations. If you choose to use the additional method, you can still vary your instalment rate in any month.
If you fail to comply with the applicable rules for applying the additional method, the Commissioner can require you to calculate your actual instalment income. Examples of incorrect applications include failing to make a reasonable estimate or choosing to use the method when you are not eligible.
Suppose you use the additional method and consistently report lower instalment income in the first two months of the instalment quarter. In that case, you may become the subject of a review. In these circumstances, the Commissioner may request information from you that will assist in determining if you have not complied with the rules of applying the additional method.
SUSPENSION OF INDEXATION OF TAX INSTALMENTS
On 10 June 2020, the Federal Government announced it would suspend the indexation of tax instalment amounts for the 2020/21 financial year in response to Covid-19.
This change will affect instalments payable to the ATO for an estimated 2.2 million taxpayers paying the PAYG income tax instalments and around 81,000 taxpayers paying GST instalments in 2020/21.
The ATO has also issued ongoing guidance on being able to vary instalments throughout 2021/22 due to the impact of COVID-19.
SBE CHANGE OF COMPANY TAX RATE
For 2021/22, activity statements will incorporate the lower 25% tax rate for eligible companies.
If you think you are eligible, but your current activity statement does not reflect the reduction in the corporate tax rate, you can vary your instalment rate or amount yourself.
Companies that choose to vary to reflect the rate reduction will not be subject to a variation penalty.
ATO CHANGES LODGEMENT REQUIREMENTS FOR ORGANISATIONS WITH OVER $20 MILLION GST TURNOVER
If your organisation’s turnover is more than $20 million annually, you need to be aware of changes to the New Tax System (Goods and Services Tax) Act 1999 (GST Act).
The GST Act requires all entities with over $20 million GST turnover to report monthly and lodge activity statements electronically.
The ATO will continue to send paper activity statements irrespective of an entity’s turnover. However, this does not remove the obligation to switch to electronic reporting for entities with over $20 million GST turnover.
Using your myGovID, you can log into the business portal at www.ato.gov.au to lodge the business activity statement.
Alternatively, if you use standard business reporting, you can automatically create and securely send the ATO selected forms online directly from your financial, accounting, or payroll software.
The amendments to the GST Act do not require organisations with under $20 million turnover to change their reporting method.
Please note that if your organisation turns over $20 million but does not submit its returns electronically or does not pay its GST liabilities, the organisation may be subject to a penalty of up to $888 per event.
PAYG WITHHOLDING VARIATION TAA 1953
The ATO from 1 July 2015 vary to nil the amount required to be withheld from withholding payments that are:
- Covered by sections 12-35, 12-40 and 12-45 of Schedule 1 to the Taxation Administration Act 1953.
- Within the class of cases described below.
This amount is required to be withheld under the power contained in section 15-15 of Schedule 1 to the Taxation Administration Act 1953 to meet the special circumstances of that class of cases.
Class of cases
There is no requirement to withhold a number of allowances as described below, provided:
- The payee is expected to incur expenses that may be claimed as a tax deduction at least equal to the amount of the allowance.
- The amount and nature of the allowance are shown separately in the accounting records of the payer.
- Cents per kilometre car expense payments up to amounts calculated using the approved cents per kilometre rate (to a maximum of 5,000 business kilometres).
- Award transport payments for deductible transport expenses. An award transport payment is a transport payment paid under an industrial instrument (i.e., an award, order, determination, or industrial agreement) that was in force under Australian law on 29 October 1986.
- Laundry (not dry cleaning) allowance for deductible clothing up to the threshold amount. The income tax law specifies an amount of $150 as the threshold amount, but this can be increased from time to time by regulation.
- Award overtime meal allowances up to reasonable allowances amount published in the annual ATO Ruling. The allowance must be paid under an industrial instrument in connection with overtime worked.
- Domestic or overseas travel allowance (excluding overseas accommodation allowance) involving an overnight absence from the payee’s ordinary place of residence up to reasonable allowances amount published in the annual ATO Ruling.
WITHHOLDING DECLARATIONS & VARIATIONS
Complete this declaration if the following applies.
You have completed a Tax file number declaration (NAT 3092) with your current payer, and you now want to:
- Advise your payer that you have become, or ceased to be, an Australian resident for tax purposes.
- Claim or discontinue claiming the tax-free threshold.
- Advise your payer of your Higher Education Loan Program (HELP), Student Start-up Loan (SSL), Trade Support Loan (TSL) or Financial Supplement repayment obligations or make changes to them.
- Claim your entitlement or vary your entitlement to a tax offset (including the seniors and pensioners tax offset – SAPTO).
A PAYG Withholding Variation Application can be completed to vary (up or down) the amount of PAYG withheld by your employer.
The application is valid for one year only and can be lodged at any time in the application year up until 30 April.
The main purpose of varying the amount of withholding is to make sure that the amount withheld during the income year best meets your end-of-year tax liability. For example, if you are going to be due a large refund on account of rental property being negatively geared, you may want to lodge an application.
Single Touch Payroll
Single Touch Payroll is a major reporting change for employers. It started from 1 July 2018 for employers with 20 or more employees who will report payments such as salaries and wages, pay as you go (PAYG) withholding and superannuation information from your payroll solution each time their employees are paid.
Single Touch Payroll has been expanded to include employers with 19 or less employees from 1 July 2019.
CHANGES TO STP REPORTING FROM 1.7.2021
Employers should now be reporting through Single Touch Payroll (STP) unless they only have closely held payees or are covered by a deferral or exemption.
There are changes to STP reporting for small employers with closely held payees and to quarterly reporting for micro employers from 1 July 2021. This may affect how you report to the ATO.
From 1 July 2021, employers must report any closely held payees through STP. You can choose to report these payees each payday, monthly or quarterly.
From 1 July 2021, STP quarterly reporting concessions for micro employers will only be available to micro employers who meet certain eligibility requirements. These now include the need for exceptional circumstances to exist.
Employers can apply for this concession through the online deferral tool from 1 July 2021.
Employers who haven’t started reporting through STP and don’t have a deferral or exemption need to start reporting now.
Remember, registered tax agents and BAS agents can help you with your tax.