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Pay-As-You-Go (PAYG) system in Australia - How does it work?

What is Pay As You Go (PAYG)?

As a business owner, you have different responsibilities in managing your business and ensuring compliance with laws and regulations is the top priority. To fulfil this responsibility in Australia, you need to understand the PAYG, i.e., the Pay As You Go tax system. PAYG refers to two different tax systems introduced by the Australian Taxation Office. One is PAYG Instalments, whereas the other is PAYG withholding.

The basic concept behind the PAYG taxes regime is that taxes are paid in advance rather than waiting for the year's end to make one large tax payment, which often becomes difficult for taxpayers to make. PAYG system also benefits the ATO who receive these payments in advance.

PAYG Instalments

Businesses have to pay their income tax in instalments when their income exceeds a certain threshold. These periodic payments are usually quarterly. PAYG instalments help businesses to avoid a large tax bill after they lodge their income tax return. PAYG Instalment does not exempt you from filing your annual income tax return.

The process for PAYG Instalments is as follows:

  • You automatically enter into the PAYG instalments system by ATO, or you can ask them to enter you.

  • You make regular tax payments during the year, usually quarterly. The amount payable is based on your estimated business and investment income.

  • When you file your tax return, the PAYG instalments paid are offset against the final annual tax liability.

The method ensures that instalments are based on income as the business earns instead of an estimate based on the previous tax submission. However, some entities and individuals may choose an instalment calculated by the ATO based on the last tax assessment plus an increment.

PAYG Instalment Amount

ATO calculates the PAYG instalment amount using the most recent tax return filed. However, ATO does adjust this amount to reflect any likely growth in the income from last year. The adjustment is based on changes in Australia's Gross Domestic Product (GDP). The instalment is calculated as the rate multiplied by the business and investment income for the period.

You can vary an instalment if you believe that the instalment rate, or the ATO calculated instalment, will pay more or less than the expected tax liability for the year.

PAYG Instalment Records

Businesses must keep calculations of PAYG instalment amounts, payment receipts, and bank statements for payments of the business activity statement (BAS) and instalment notice. The records are to be kept for five years.

PAYG Withholding

PAYG withholding is an employer's legal obligation to withhold tax from payments made to employees and contractors. As an employer, it is mandatory to withhold a certain percentage of an employee's gross pay as income tax liabilities. These payments are then sent directly to the ATO.

Before your start PAYG withholding, the following things are to be kept in mind:

  • The business must be Registered for PAYG withholding before making any payment subject to Withholding.

  • The PAYG withholding registration can be cancelled if you are no longer an employer.

  • Businesses must ensure that the employee is legally allowed to work in Australia before entering a work agreement or contract.

  • The PAYG withholding is different from payroll tax.

Payments eligible for Withholding

The most common payments from which you are required to withhold amount are made to:

  • Employees

  • Directors

  • Entities that don't quote their ABN

  • Contractors having a voluntary agreement with you

Registration for PAYG Withholding

Businesses who have an active ABN (Australian Business Number) can register their PAYG withholding business account:

  • online through ATO’s Online services for business

  • through a registered tax agent

  • using their Standard Business Reporting (SBR) compatible software

  • by phoning ATO’s business line if you're an authorized business contact.

In case you don’t have an ABN, then you can register by:

  • phoning ATO business line

  • completing an Application to register

  • contacting your registered tax agent or BAS agent.

Cessation of PAYG Withholding Obligation

Suppose you cease being an employer or are no longer operating your business. In that case, you will no longer be obliged to withhold the payment amount. You will then be advised to cancel your PAYG withholding registration. You can cancel your ABN and PAYG withholding registration if you cease running your business.

The cancellation of your PAYG withholding account is also similar to the registration process; you can cancel by:

· calling the ATO business line

· completing an application to cancel the registration

· asking your registered tax agent or BAS agent.

If you have any questions about PAYG, please contact the team at Cleverly Accounting for more information.


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