What is the difference between PAYG withholding and instalments

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) system. There are two types of PAYG - withholding and instalment. Let's explore how each one works

What is Pay As You Go (PAYG)

Pay As You Go (PAYG) is a system where the Australian Tax Office (ATO) allows you to pay a portion of a future liability in advance, in order to reduce the amount owing to the ATO at the end of the financial year. Making regular payments throughout the year reduces the risk in being hit with a large bill later on, and helps businesses manage their cashflow a little better

There are two types of PAYG -
  • PAYG Withholding (or PAYG-W) which is a pre-payment on behalf of your employees for their personal income tax obligations
  • PAYG Instalment (or PAYG-I) which is a pre-payment for the business for it's own corporate income tax obligation

The main difference is that one is a pre-payment on behalf of your employees, and the other is on behalf of your business. Both for income tax provisions!

Why withhold PAYG on behalf of your employees?

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!

As an employer, you help out your employees by making those contributions on their behalf by deducting the tax from their pay and then paying that onto the ATO

When does a business need to withhold PAYG?

As an employer you collect pay as you go withholding amounts from payments you make to your employees, other workers such as contractors that you have agreements with, and businesses that you pay that don't quote their ABN

How do I withhold PAYG?

The first step is 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 myGovID account. Once you've registered, you must withhold from wages and other payments, lodge activity statements and pay what you withhold to the ATO. To make the process a little easier, accounting software like Xero can simplify preparing activity statements!

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.

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Andrew Erkins

A passion for technology and people inspired Andrew to co-found Digit. With a background in information systems, he loves business strategy and figuring out what makes things tick (and how it could tick better)

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