Does My Business Have PAYG Withholding Obligations?

Question: What Does PAYG Mean?

Answer:

Pay As You Go (PAYG) withholding refers to the obligations of businesses to withhold certain amounts from the payments made to employees and other payees. They must then send those withheld amounts to the Australian Taxation Office (ATO).

Do I Have Withholding Obligations?

Your business will have withholding obligations if you:

have employees;
have other workers such as contractors that you enter into voluntary agreements to withhold amounts out of your payments to them; or
make payments to other businesses that don’t quote their Australian Business Number (ABN).

If your business has withholding obligations, you must:

register for PAYG withholding;
withhold amounts from wages and other payments;
lodge activity statements and pay the withheld amounts to the ATO;
provide payment summaries to all employees and other payees by 14 July of each year; and
provide a PAYG withholding payment summary annually to the ATO by 14 August of each year.

How Do I Know How Much to Withhold?

Each year, the ATO produces tax tables which set out the amount that businesses must withhold from payments made to employees and other payees. The ATO also has a PAYG withholding calculator which assists you to work out the correct amount to withhold.

The specific amount that your business should withhold depends on a range of variables relating to your business and your employee. Some influencing factors include:

whether an employee claims the tax-free threshold;
whether the employee has a HELP debt; and
the frequency of the pay cycle.

Reducing PAYG Withholding

It is possible for an employee or payee to apply to the ATO to reduce the amount the employer needs to withhold on their behalf.

For example, a reason a person may wish to reduce the amount withheld is if they have a negatively geared investment property.

Employees may prefer their employers to withhold the full amounts required as a forced saving mechanism. Employees can then claim the amount withheld at the end of a financial year. Then, some of it will be returned in an annual tax return. Alternatively, some employees may require the additional cash flow and would prefer to reduce the amounts regularly withheld.

What Happens if I Don’t Comply With My PAYG Withholding Obligations?

If your business is obligated to pay a PAYG withholding amount to the ATO, you must comply with this. However, if you fail to meet your PAYG withholding obligations, you will have to pay a penalty that is equal to the amount that you should have withheld or paid.

If you are a director of a company, you are legally responsible for the company fulfilling their PAYG withholding obligations. If the company fails to do so, you will be personally responsible for paying the penalty.

PAYG Withholdings vs PAYG Instalments

In contrast to PAYG withholdings, PAYG instalments refer to your business’ ability to make regular payments throughout the year towards your expected annual income tax liability. This can reduce a large tax payment that you would otherwise need to pay at the end of the financial year.

Answered by Sophie Mao

Sophie is a Lawyer in LegalVision’s Corporate Advisory, Business Structuring and Capital Raising teams. She is passionate about helping startup clients structure and grow their businesses, and has co-authored many of LegalVision’s business structuring and capital raising articles and publications.