PAYG Withholding

 

What is PAYG Withholding?
PAYG Withholding is a system where businesses must withhold a certain amount of tax from income payments made to employees, company directors, office holders, and contractors. The withheld amounts are then remitted to the Australian Taxation Office (ATO) by the employer. 

payments subject to PAYG withholding

Payments to employees, company directors & office holders
When employees are paid salaries, wages, bonuses, and allowances, a portion of these amounts must be withheld to cover their income tax liabilities. The withholding amount is determined based on each employee’s tax circumstances, as indicated by their Tax File Number (TFN) declaration and any applicable deductions or offsets. Similarly, PAYG withholding applies to company directors and officeholders receiving payments, and tax must be withheld and remitted to the ATO.

Payments to workers under labor-hire agreements
If workers are engaged through labor-hire agreements, there may be PAYG withholding obligations, depending on the nature of the arrangement. In such cases, the employer must differentiate between employees and contractors to determine whether PAYG withholding applies.

Contractors may be subject to PAYG withholding if they voluntarily agree to request PAYG withholding.

Payments under voluntary agreements
In some cases, contractors may voluntarily enter into agreements with you, requesting PAYG withholding on their payments. If such agreements are in place, you must withhold and remit the specified amounts to the tax authorities as per the agreement’s terms.

Payments without an Australian Business Number (ABN)
If a payment is made to a supplier or contractor without an ABN, PAYG withholding may apply.

Other payments requiring PAYG withholding
Apart from payments made to employees and contractors, other types of payments also require tax withholding. These include:

• investment income to individuals who do not provide their Tax File Number (TFN)
• dividends, interest, royalties paid to non-residents of Australia,
• payments to certain foreign residents for specific activities
• payments to Australian residents working overseas
• super income streams
• annuities
• payments made to individuals who are beneficiaries of closely held trusts.

Exceptions to PAYG withholding obligations

Sole Traders or Partnership Structure
If you operate your business as a sole trader or partnership and draw amounts from the business for personal use, these drawings are not subject to PAYG withholding. This is because such withdrawals are not considered wages or salary payments. Instead, as a sole trader or partner, you must make provisions for your income tax liability through PAYG Instalments.

Employee or Contractor Earning Below the Tax Free Threshold
An employer is not obligated to withhold PAYG tax from payments made to an employee or contractor who earns below the tax free threshold of $18,200 for the tax year. In such cases, they can claim the withheld amount back at the end of the financial year through their individual tax return. This allows them to receive a refund for any excess tax withheld from their income.