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AU Tax 2024

Pay As You Go (PAYG) Withholding Explained

PAYG withholding tax, also called a retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require withholding tax on payments of interest or dividends. In most jurisdictions, there are additional withholding tax obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate.

Governments use withholding tax as a means to combat tax evasion, and sometimes impose additional withholding tax requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.

Typically the withholding tax is treated as a payment on account of the recipient's final tax liability, when the withholding is made in advance. It may be refunded if it is determined, when a tax return is filed, that the recipient's tax liability to the government which received the withholding tax is less than the tax withheld, or additional tax may be due if it is determined that the recipient's tax liability is more than the withholding tax. In some cases the withholding tax is treated as discharging the recipient's tax liability, and no tax return or additional tax is required. Such withholding is known as final withholding.

The amount of withholding tax on income payments other than employment income is usually a fixed percentage. In the case of employment income the amount of withholding tax is often based on an estimate of the employee's final tax liability, determined either by the employee or by the government.

PAYG withholding Explained

Under the Pay as you go (PAYG) withholding rules, you have an obligation to collect tax from payments you make to employees and some businesses so they can meet their end-of-year tax liabilities.

You'll have withholding obligations if any of the following apply:

  • You have employees
  • You have other workers, such as contractors, and you enter into voluntary agreements to withhold amounts from your payments to them
  • You make payments to businesses that don't quote their Australian business number (ABN).

You must apply to register for PAYG withholding before you are first required to withhold an amount from a payment.

As an employer, you have other legal obligations, aside from tax and super. You must only employ legal workers – that is, Australian citizens, permanent residents and non-citizens with Australian visas that allow them to work.

As an employer, you may need to withhold amounts from payments you make to your workers and other businesses and send the withheld amount to us.

The most common payments you withhold amounts from are those to:

  • Your employees
  • Your directors
  • Businesses that don't quote their ABN to you
  • Contractors who have a voluntary agreement with you.

If you operate your business as a sole trader or partnership and you draw amounts from the business, this is not a wage and you don't have to withhold from these drawings. You make some provision for your income tax liability through PAYG instalments.

In this category there are many sub categories which you can view from the following links,

  • Registering for PAYG withholding – follow this link, https://bp.ato.gov.au
  • Payments you need to withhold from
  • Paying and reporting withheld amounts
  • Payment summaries and annual reports
  • When a worker leaves or retires
  • No longer need to withhold