What is a Pay-as-you-go tax?
The pay-as-you-go or PAYG tax withheld system is critical to the progressive Australian tax-transfer system.
PAYG tax withheld allows tax residents to pay towards their income tax liability as they earn. It helps prevent residents from having large sums of tax to pay at the end of the year.
ATO provides tax tables with complete details of how much PAYG to withhold.
The PAYG tax system has two key components, PAYG withholding and PAYG instalments.
PAYG tax withheld
PAYG tax withheld typically means the tax retained from the source income of an employee.
They are usually done by deducting a fixed amount from the gross salary or wage payment. This would mean that an employer would generally withhold this amount and lodge it with ATO on behalf of the employee.
This explains the tax deduction amount in your payslips; the total tax amount paid is usually the difference between gross and net wages in your payslip.
PAYG Tax = Gross Wages – Net Wages
These payments are based on the expected income level of an individual and act as a contribution towards the total annual tax liability.
Furthermore, when the income tax return is lodged at the end of the financial year, tax withheld acts as a credit towards your total tax payable.
Therefore, if you get a refund, it is due to having a higher PAYG tax withheld during the year – which is returned as a tax refund to your accounts.
To simplify, at the time of tax return lodgement
Estimated Tax Return = Total Tax Withheld – Total tax liability due
Tax Refunded = Total tax withheld > Total Tax liability due
Tax Payable = Total tax withheld < Total Tax liability due
So, you can keep track of this by using our easy-to-use pay calculator to determine the estimated tax return value.
PAYG Instalments
What happens after an employer withholds tax from their employee salaries?
ATO requires them to lodge periodic PAYG instalments to contribute towards business and the employee’s tax liability.
Exceptions apply to businesses and may vary. The PAYG instalment obligations depend on the size and annual turnover of the company.
Criteria for PAYG Instalment payment frequency:
| Business Size | ATO Lodgement Frequency |
| Annual Tax withholding < $25,000 | Quarterly |
| Annual Tax withholding = $25,001 – $1,000,000 | Monthly |
| Annual Tax withholding > $1,000,000 | 6-8 days |
Furthermore, to determine how much PAYG tax to pay in the financial year 2022-23, please check Tax Tables or visit our home page for the PAYG tax calculator.
Frequently Asked Questions
What types of payments are businesses required to withhold?
ATO requires all businesses to withhold an amount from all direct payments made to any of the following parties :
>> Wages to employees or contractors
>> Payments to Company Directors
>> Workers who opt-in with a voluntary agreement
>> Any other parties involved in business activities who have not quoted their ABN
Do businesses have an obligation to maintain any records?
ATO requires all businesses to withhold an amount from all direct payments made to any of the following parties :
>> Wages to employees or contractors
>> Payments to Company Directors
>> Workers who opt-in with a voluntary agreement
>> Any other parties involved in business activities who have not quoted their ABN
What is the process of submitting PAYG data to the ATO?
ATO requires all registered PAYG withholders to maintain the following records for at least five years :
>> Wages and payments to employees
>> TFN and withholding declarations
>> Payment summaries, payment summary statements and annual reports
>> Personal Services Income (PSI) records
>> Voluntary agreements
>> Records of amounts you withheld where no ABN was quoted
How and when to register for PAYG?
Suppose you are a business that meets the set criteria for withholding. You must obtain a Payment Reference Number (PRN) and register with the ATO. Businesses can only withhold PAYG from any payments if they are registered and authorised to do so by ATO.
Businesses must maintain all records essential to payments withheld and lodge and pay them when obligation falls due.
Who is exempted from paying a PAYG withholding tax?
Any income derived by businesses operating as sole traders or partnerships for personal use, i.e., drawings, would be exempted from PAYG withholding. However, this needs to be accounted for, reported and lodged in both entity’s and individuals’ tax returns.
