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Spelling out the PAYG systems in Australia

PAYG simply stands for Pay As You Go and is an acronym used for two different processes systemised by the Australian Tax Office (ATO) for businesses in Australia.

One of the systems, termed PAYG instalments, allows you and your business to meet your income tax obligations by making payments at the end of each quarter of the year. These quarterly payments go towards the expected income tax obligation accumulated from your business and investment income for the current financial year.

The ATO will provide written communication if you are required to make these payments, but generally it will apply to a business owner, investor or sub-contractor who earns a certain amount of income. Specifically, you will be obligated to complete PAYG instalments if you are an Australian resident or trust with a reported gross business or investment income of $4000 or more. This is unless your tax payable on your latest notice of assessment is under $1000. Alternatively, you are not required to complete PAYG instalments if your notional tax, the estimate of the tax payable excluding capital gains tax, is less than $500. Or if as an individual, you entitled to the seniors and pensioners tax offset, you are also not required to make PAYG instalments.

PAYG instalments need to be completed by companies or superfunds if the ATO calculated an instalment rate of above zero for your GST-registered organisation. You are also obligated if your notional tax is $500 or more, or your reported income accumulated from business and investment, but excluding capital gains, is $2 million or more. You are also obligated if you are the head of a consolidated group. It is important to note however, that there are special rules that apply to PAYG instalments for different business and company structures, trusts, primary producers and consolidated groups.

The other system is PAYG withholding, which is when you pay employees and some contractors, you need to withhold some of the payment and send it to the ATO at regular intervals. Effectively, you are paying your employee or contractor’s tax obligation of their income on their behalf. Should your employee or contractor be earning under the tax-free threshold, they can make a claim against the amount withheld by your business at the end of the financial year through their individual tax return.

You will need to register for PAYG withholding if you make payments to businesses that do not quote their Australian business number (ABN) or have employees. Another condition is if you have other workers, such as contractors, and your voluntary agreement with them includes your business being able to withhold amounts from their pay.

Understanding the various tax systems in place by the Australian government can be difficult to navigate and understand. It requires a detailed understanding of not only the rules and regulations set by the ATO, but also the financial state of your business. Having this understanding comes with disciplined bookkeeping and diligent assessments of your business, in which knowledgeable tax accountants can assist you with. They can provide reliable tax advice and more to individuals, and small, medium or large businesses right around Melbourne.