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Pay-as-you-go tax explained

What you need to know about PAYG taxes.

If you are earning income in Australia you probably have pay-as-you-go (PAYG) tax obligations. Both individuals and businesses pay taxes through instalments and withholding.

  • Instalments: Taxes paid on business income or investment income above a certain threshold.
  • Withholding: Money withheld from income, where the differences may be claimed back.

Everyone earning taxable income in Australia has individual tax obligations, while business owners have both business and individual tax obligations. To meet these obligations you should know about both types of PAYG tax.

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PAYG instalments

You will automatically be entered into the PAYG instalments system once you register business or investment income above $4,000 in a year. If you are required to start making PAYG instalments, the Australian Taxation Office (ATO) will send you a letter explaining your options. If you are registered for myGov and your account is linked to the ATO, then this will be sent electronically and you will receive an email notification.

Who needs to make PAYG instalments?

Everyone earning more than $4,000 a year from business or investments will need to make PAYG instalments. For those who are not Australian residents, this amount is $1 instead. You are only exempt if you are an Australian resident and:

  • The tax payable on your latest notice of assessment is less than $1,000
  • Your notional tax is less than $500
  • You are entitled to the seniors and pensioners tax offset

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What are the options?

The amount you owe with PAYG instalments will vary depending on which option you choose. Individuals may choose either option freely, while businesses have more conditions surrounding what they can do.

Instalment amount (calculated on predicted income): Your tax owed is calculated based on the information in your tax returns. Businesses and super funds may only select this option if earning less than $2 million per year, or paying instalments annually.

The main advantage of selecting the instalment amount option is that your tax obligations are automatically calculated for the coming year and you don’t have to work it out yourself.

Instalment rate (calculated on actual income as it’s earned): You work out your own tax rate based on an instalment rate provided by the ATO. Business owners must select this option if their business is earning more than $2 million annually and is not a small business entity.

The main advantage of selecting the instalment rate option is that your payments are based on your income as you earn it, assisting with cash flow management. For example, if you have a quarter with no earnings then you will have no tax obligations that quarter.

If you think you’ll be earning more than $4,000 from your business or from investments in the coming year, then the ATO recommends choosing the instalment rate option. If your instalment rate or amount seems too high, there might be a reason for it and ways you can vary it.

PAYG withholding

This is money withheld from earnings paid to employees, or certain transactions with other businesses. Your personal income tax is typically withheld and when you file your personal tax return, including deductions, you may claim back a portion of the amount withheld.

Who needs to pay PAYG withholding?

You have PAYG withholding obligations if you make payments to businesses that don’t quote their Australian Business Number (ABN). All business owners also have withholding obligations if they have employees or if they have entered into withholding agreements with contractors or other types of workers.

If this applies, you must register for PAYG withholding before your first payment is due.

If you are operating as a sole trader or a partnership, then money drawn from the business does not count as a wage and is therefore taxed through instalments instead.

Making PAYG withholding payments

When you register for an ABN, the ATO will send you a business activity statement (BAS) when it’s time to lodge withholding tax, either monthly or quarterly.

When reporting monthly, the due date is typically the 21st of the next month. When reporting quarterly, the due dates are the 28th of October, February, April and July.

Simply by filling the statement out correctly you can ensure you’ve met your PAYG withholding obligations. To make it easier, your BAS withholding comes divided into several sections, with a different one for each type of payment.

While the ATO has taken steps to make it as straightforward as possible, tax obligations can still be difficult to understand. Taking advantage of the right options can help you pay less tax than you might otherwise and for this reason, a lot of people use tax agents to help get an optimal rate. If you have complex tax needs, think you’re paying too much or simply want to make the whole process easier, you might consider finding a tax agent instead of doing it all yourself.

The ATO sends letters to all businesses that have to pay PAYG instalments. If you receive such a letter, you will need to register for PAYG and start paying regular instalments to the tax office.

Andrew Munro

Andrew writes for finder.com.au, comparing products, writing guides, sniffing out deals and looking for new ways to help people get the most out of their money.

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30 Responses

  1. Default Gravatar
    JudithOctober 26, 2016

    Are PAYG instalments compulsory?

    • Staff
      ClarizzaOctober 27, 2016Staff

      Hi Judith,

      Thanks for your question.

      The ATO typically notifies you if you are required to make PAYG instalments. The ATO makes this assessment based on a criteria and your tax returns.

      Regards,
      Clarizza

  2. Default Gravatar
    EbenJanuary 3, 2016

    Hi I am trying to work out how to register for PAYG through the business portal. I have followed the links you had posted previously, they direct me to login to business portal, but once I am in I cannot find the option to register anywhere on the business portal.

    • Staff
      ShirleyJanuary 4, 2016Staff

      Hi Eben,

      Thanks for your question.

      Please see this page from the ATO for more information on registering your business for PAYG. You’ll need an ABN and can register through bp.ato.gov.au

      Hope this helps,
      Shirley

  3. Default Gravatar
    TungNovember 8, 2015

    I would like to ask for the fees for registration pay as you go withholding ?

    • Staff
      ElizabethNovember 11, 2015Staff

      Hi Tung,

      Thanks for your question.

      There are no fees to register for PAYG withholding. Once you have registered for PAYG withholding, you then need to start withholding the appropriate amount of PAYG tax from eligible payments made by your business.

      I hope this has helped.

      Thanks,

      Elizabeth

  4. Default Gravatar
    julieAugust 17, 2015

    What % of what you earn goes to the taxation office for paying on our abn i know that if we put more aside each week then we shouldn’t get hit with a big tax bill but there is no stipulated % shown in any information given please advise.
    thanks

  5. Default Gravatar
    AndyNovember 10, 2014

    Hi,

    not sure if this is still applicable, but i am struggling to find the link on the business portal to register for PAYG with holding as well.. if there is still a link could i have that emailed to me? thank you

    • Staff
      ElizabethNovember 11, 2014Staff

      Hi Andy,

      Thanks for your question.

      I have emailed you the link to register.

      Thanks,

      Elizabeth

  6. Default Gravatar
    KaihlaSeptember 1, 2014

    Hi can you please send me the link to find where to register for PAYG

    • Staff
      ShirleySeptember 2, 2014Staff

      Hi Kaihla,

      Thanks for your question.

      Please see this page to register for PAYG.

      Cheers,
      Shirley

  7. Default Gravatar
    VeeBeeMarch 8, 2014

    I am also having trouble finding the link to register for PAYG withholding. Please send me the link

    • Staff
      ElizabethMarch 10, 2014Staff

      Hi VeeBee,

      Thanks for you comment.

      I have just emailed you the link, it should now be in your inbox.

      Thanks,

      Elizabeth

  8. Default Gravatar
    February 27, 2014

    hi, I’m having trouble finding PAYG withholding link in Business Portal also. Can you advise please?
    thanks.

    • Staff
      ShirleyFebruary 27, 2014Staff

      Hi Penny,

      Thanks for your comment.

      I’ve emailed you a link, please check your inbox.

      Cheers,
      Shirley

  9. Default Gravatar
    AndyJanuary 8, 2014

    Hi, I used to work in a University as a researcher only and have permanently left Australia last October. I have finished 2013-2014 financial year tax refund when I left Australia. Several days ago I was surprised to receive a PAYG instalments letter from ATO telling me to pay instalments. I was wondering whether you can tell me my qualification to pay this. I’m really confused about this instalment that I never quite know this.

    • Staff
      MarcJanuary 9, 2014Staff

      Hello Andy,
      thanks for the question.

      You may wish to contact the ATO directly about this matter, and if you feel as though it’s unfair, lodge a dispute. I’ve emailed you more information about this.

      I hope this helps,
      Marc.

    • Default Gravatar
      AndyJanuary 9, 2014

      Thanks Marc,

      I’ll have a try.

      Cheers,
      Andy

  10. Default Gravatar
    RenaeDecember 7, 2013

    Hi, I am exactly the same as your other questions- I cannot find the link in business portal to register for the PAYG withholding, can you tell me where it is please?

    • Staff
      MarcDecember 9, 2013Staff

      Hello Renae,
      thanks for the question.

      I’ve emailed you the relevant page for this.

      Cheers,
      Marc.

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