PAYG Withholding is a system where you, as a business owner, must withhold a certain amount from payments made to your workers, including employees, company directors, office holders, and contractors.
You then remit these withheld amounts to the tax authorities to fulfill your workers’ tax obligations. This system helps you and your workers manage tax liabilities efficiently and ensures smooth tax collection for the government.
Types of Payments Subject to PAYG Withholding
1. Payments to Employees, Company Directors & Office Holders
When you pay your employees, such as salaries, wages, bonuses, and allowances, you must withhold a portion of these amounts 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 you must withhold tax and remit it to the tax authorities on their behalf.
2. Payments to Workers Under Labor-Hire Agreements
If you engage workers through labor-hire agreements, you may have PAYG withholding obligations, depending on the nature of the arrangement.
In such cases, you must differentiate between employees and contractors to determine whether withholding applies.
Contractors may be subject to PAYG withholding if they voluntarily agree with you requesting withholding.
3. 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.
4. Payments without an Australian Business Number (ABN)
When you pay suppliers, contractors, or other payees, ensure that the recipient quotes their ABN.
If a payment is made without an ABN, PAYG withholding may apply, and you are required to withhold tax from the payment and remit it to the tax authorities as part of your tax compliance obligations.
Consequences of Non-Compliance
Failing to comply with PAYG withholding obligations can have serious consequences for your business. If you fail to withhold tax from a payment, you may lose the entitlement to claim a tax deduction for that particular payment.
Additionally, the tax authorities impose penalties on your business for non-compliance, further impacting your financial standing.
Other Payments Requiring Tax 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
- Payments made to individuals who are beneficiaries of closely held trusts.
Reporting and Remitting Withheld Amounts
To fulfill PAYG withholding obligations, you need to accurately report the withheld amounts in the PAYG tax withheld section of your Business Activity Statement (BAS).
The BAS serves as a summary of your business’s tax obligations for a specific period. Alongside reporting, you must remit the withheld amounts to the tax authorities within the specified timeframes.
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
You are 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 2022-23.
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.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.