The ATO has a few methods for making tax time easier each year, but one of the most commonly known is the Pay As You Go (PAYG) withholding system.
PAYG helps employees divide their tax liabilities into equal payments throughout the year rather than paying all at once. For employees and sub-contractors, facing a huge annual bill is potentially financially disastrous, so using PAYG is beneficial to both the government and taxpayer!
Who Uses PAYG Instalments?
As an employee, you probably don’t think about PAYG because your taxes are withheld from your paycheque automatically. As a business owner, though, you’ll need to be a little bit more involved with the PAYG system. If you have employees, withholding arrangements with your contractors, or make payments to businesses that don’t quote their ABN, you have withholding obligations.
How Do I Handle PAYG Instalments for Others?
If you are required to withhold taxes, you first need to register for PAYG withholding. You can do this online at the same time that you apply for your ABN or you can register later using your administrator AUSkey. Once you’ve registered, you must withhold from wages and other payments, lodge activity statements and pay what you withhold to the ATO, provide documentation of this to those your withholding for, and lodge a PAYG withholding payment summary annual report with the ATO. To make the process a little easier, accounting software like Xero can help with preparing these reports!
How Do I Handle PAYG Instalments for my Company?
Companies must pay toward their expected income tax liability throughout the year, just as individuals do. Fortunately, the ATO will calculate and notify you of your instalment rate based on your annual tax return. You’ll receive a notice if your instalment rate is more than 0% or if your notional tax is more than $500. If your gross business and investment income is more than $2 million, you will probably be limited to the instalment rate option.
Of course, you can choose to calculate the amount of your instalments yourself, based on the income you make each quarter. This can be helpful to manage cash flow when business changes drastically. If you’d like to perform your own calculation each quarter, just multiply your instalment income (the sum of your business and investment income) by your instalment rate (provided by the ATO).
The result is the amount you should pay to the ATO for the quarter. Again, if your gross business and investment income is more than $2 million, you’ll need to use this method to calculate your own rate—unless your company is eligible to pay the annual PAYG instalment. This fact sheet will help you determine if you’re able to pay annually as opposed to the usual four (or two) times per year.
If you’d like to know more about PAYG and how to maintain your compliance, contact our knowledgeable team here.