All about Pay As You Go (PAYG) tax
Pay as you go (PAYG) tax is one of the many different types of taxes that has to be paid by an Australian business. This type of tax is typically divided into two main categories namely, Pay As You Go Withholding and Pay As You Go Instalments. In this article we will focus on both these types of PAYG taxes and understand the main differences between them.
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How to submit PAYG withholding in the ATO business portal
- Click on “Business Registration Details” on menu to the left
- Choose “Registrations” from options and click next
- Tick Activity Statement and click on Tax Type Summary
- Click on Add Tax Type
- There you can choose GST and IT Withholding (PAYGW)
Pay As You Go (PAYG) withholding
The Australian Taxation Office has a PAYG withholding system whereby a business has to withhold certain amount of money as PAYG taxes from the salary or wages paid to their employees. Not just to employees of the company, but if you make payments to other businesses that have not provided their Australian Business Number (ABN) to your company, or you make payments to contractual workers, even then you may have to withhold PAYG taxes from the money paid to them. The money so withheld is then deposited with the ATO on behalf of the individuals or businesses from whom the money was withheld.
The reason for the PAYG withholding system is to enable people to meet their income tax obligations and liabilities at the end of the year. If no money was withheld as PAYG taxes and the entire salary was paid to employees, then they might find it very difficult to pay their income tax at the year-end as all the money could be spent. Hence, to reduce their burden of paying the taxes, the ATO makes it compulsory to keep paying the PAYG taxes in regular instalments. This type of PAYG tax is hence not an additional tax burden for a business as it is simply withheld from another person’s payment.
If your business is making any type of payments to employees, contract workers, or other companies that are subject to PAYG withholding, then your business must fulfil the following obligations:
Register for PAYG
You need to register your business with the Australian Taxation Office for PAYG tax. In order to register for PAYG, you should have an ABN number for your business. If you have not registered for ABN, you can register for both these things at the same time. It is important to note that your application for PAYG registration should be completed before the day you have to withhold your first amount as PAYG tax. The register for an ABN you must visit the Australian Business Register website and apply. Then you'll have to call 1300 720 092 to get a copy of the appropriate form to add a new business account. After this you'll have to call 13 28 66.
Withhold the appropriate amounts from payments
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. The amount that you need to withhold will depend on the income of the recipient as well as the amount of payment being made by you.
Pay the withheld amount to ATO
Every business needs to submit a report of the PAYG amount that they have withheld and pay such amounts to the ATO regularly. The size of your business and amount withheld will determine the frequency of the payments that you need to make. While the amount withheld may have to be paid in instalments, you have to submit an annual withholding report to the tax authorities. In order to submit an accurate report, you will also be required to maintain certain books and records of withholding payments.
In addition to the above, you will also need to advise your employees or other contractual workers about the amount that you have withheld from their payments so that they can file their income tax returns accordingly.
Pay As You Go (PAYG) instalments
While PAYG withholding is a tax that is withheld from others, PAYG instalment is a tax that is the sole liability of your business. This type of tax has to be paid according to the expected tax liability that your business may incur at the end of the year on business activity income as well as investment income. Hence, instead of paying the tax at the end of each year in one lump sum payment, the ATO requires you to pay the expected amount of tax as PAYG instalments several times a year. The instalments will not be an exact reflection of your tax liability but will simply be an estimated amount depending on previous year incomes. Hence, PAYG instalments only start from the second year of your business.
At the end of the year, your business will compute its exact tax liability through the income tax returns and file it with the tax authorities. Your return will be assessed and your actual tax liability for that year will be determined. All amounts paid as PAYG instalments will be credited as tax already paid. After crediting the PAYG instalment amount, if your business still has pending tax liability then you will have to pay additional tax. However, if the PAYG instalments are higher than your actual tax liability, you will be eligible for a tax refund.
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.