Pay-as-you-go tax explained
What you need to know about PAYG taxes.
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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.
Speak to a financial planner to help you organise PAYG
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.
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.
- Learn how to complete each withholding section here
- See how to fill out the rest of the BAS here
- Find out how to lodge your BAS
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.
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