PAYG (Pay As You Go) withholding is an Australian taxation system where employers withhold a portion of payments made to employees and certain contractors, then remit these amounts to the Australian Taxation Office (ATO). This system helps recipients meet their expected tax liabilities by spreading payments throughout the year rather than facing a large tax bill after lodging their annual tax return. PAYG withholding applies to salary and wages, certain government payments, and payments where an Australian Business Number (ABN) is not quoted.

Purpose and function

Tax collection mechanism

PAYG withholding serves as the primary method for collecting income tax in Australia:

• Pre-collects tax throughout the financial year
• Reduces the risk of tax debt at year end
• Provides a steady stream of revenue to the government
• Simplifies tax compliance for individuals
• Creates visibility of income for the ATO

Integration with income tax system

PAYG withholding works alongside the broader tax framework:

• Amounts withheld are credited against tax assessed at year end
• May result in a tax refund if withholding exceeds final tax liability
• May result in additional tax payable if withholding is insufficient
• Forms part of the Pay As You Go system (which also includes PAYG instalments for other income types)

When PAYG withholding applies

Employment payments

Withholding applies to payments made in the course of employment:

• Salary and wages
• Commissions and bonuses
• Allowances
• Overtime payments
• Paid leave (annual leave, personal/carer’s leave, long service leave)
• Termination payments
• Employment termination payments (ETPs)
• Unused leave payments

Contractor arrangements

Withholding may apply to payments made to contractors in certain circumstances:

• Where a voluntary agreement is in place
• Where the contractor has not quoted an ABN
• For labour hire arrangements
• For specified payments to performing artists
• For payments under the Taxable Payments Reporting System in high-risk industries

Government payments

Various government payments are subject to PAYG withholding:

• JobSeeker Payment
• Age Pension
• Parenting Payment
• Youth Allowance
• Disaster Recovery Allowance
• Paid Parental Leave

Other payment types

Additional transactions requiring PAYG withholding:

• Superannuation income streams and lump sums
• Unused leave payments
• Foreign resident withholding (including capital gains withholding)
• Payments to non-residents for entertainment or sports activities
• Distributions from closely held trusts where tax file numbers are not quoted

PAYG withholding rates and calculations

Tax tables and schedules

The ATO provides various withholding schedules:

• Weekly tax tables (most common for regular salary payments)
• Fortnightly tax tables
• Monthly tax tables
• Tax tables for working holiday makers
• Schedules for HELP, SSL, TSL, or SFSS debt repayments
• Medicare levy adjustment tables
• Foreign resident withholding schedules

Factors affecting withholding amounts

The amount withheld is determined by multiple factors:

• Gross payment amount
• Tax file number (TFN) provision
• Residency status
• Tax-free threshold claim
• Medicare levy exemptions or reductions
• Tax offsets claimed (e.g., Seniors and Pensioners Tax Offset)
• Higher Education Loan Program (HELP) or other study debts
• Child support obligations
• Court-ordered garnishee amounts

Special withholding rates

Particular circumstances have specific withholding requirements:

• No TFN provided: withholding at the top marginal rate plus Medicare levy (currently 47%)
• Working holiday makers: specific tax rates (typically 15% on income up to $45,000)
• Foreign residents: generally higher rates with no tax-free threshold
• Seniors and pensioners: reduced withholding to reflect applicable tax offsets
• Children under 18 receiving unearned income: higher rates for income above threshold

Employer obligations

Registration requirements

Employers must register for PAYG withholding:

• Before making the first payment requiring withholding
• Via the Australian Business Register or through a registered tax agent
• As part of the process for obtaining an Australian Business Number (ABN)
• When becoming an employer for Superannuation Guarantee purposes

Withholding processes

Operational requirements for employers:

• Calculate correct withholding amounts using ATO tables or payroll software
• Withhold amounts from payments when made
• Provide payment summaries annually (unless reporting through Single Touch Payroll)
• Lodge annual PAYG withholding reports (if required)
• Issue Tax File Number declaration forms to new employees
• Accept and process Tax Withholding Variation applications

Remittance to the ATO

Frequency and methods for paying withheld amounts:

• Small withholders (less than $25,000 per year): quarterly payment
• Medium withholders ($25,000 to $1 million per year): monthly payment
• Large withholders (more than $1 million per year): more frequent electronic payments
• Payment methods include electronic transfer, BPAY, credit card, or direct debit
• Due dates based on withholding category and reporting periods

Single Touch Payroll (STP) Reporting

Modern reporting requirements:

• Real-time reporting of payroll information to the ATO
• Includes salaries, wages, PAYG withholding, and superannuation information
• Eliminates need for payment summaries and annual reports
• Phase 1 included basic payroll data
• Phase 2 (implemented from 2022) includes more detailed payment information

Employee considerations

Tax File Number (TFN) Declaration

Requirements when starting new employment:

• Must be completed within 14 days of starting
• Declares residency status and tax-free threshold claim
• Provides basis for withholding calculations
• Informs employer of HELP debts and tax offset claims
• Can be updated if circumstances change

Tax-free threshold

Management of the tax-free threshold claim:

• First $18,200 of annual income is tax-free (2023-24)
• Generally claimed from only one employer (usually the highest paying or primary employer)
• Should not be claimed for second or subsequent jobs
• Can be adjusted by submitting a new TFN declaration
• Impacts weekly/fortnightly tax withholding amounts

PAYG withholding variation

Process for adjusting standard withholding amounts:

• Available where standard withholding would result in significant refund
• Commonly used for investment property deductions, work-related expenses, or salary packaging
• Application made to the ATO (not the employer)
• Employer must apply variation once received from ATO
• Expires at the end of each financial year
• New application required annually

Income statements and payment summaries

Documentation of income and tax withheld:

• Available through myGov for STP-enabled employers
• Shows year-to-date and annual totals
• Required for preparing tax returns
• Classified as ‘Tax Ready’ when finalised
• Replace traditional payment summaries (group certificates)

Special situations

Departing Australia Superannuation Payments (DASP)

Withholding from superannuation for departing temporary residents:

• Rates between 35% and 65% depending on visa type and components
• Higher rate (65%) for working holiday makers
• Lower rate (35%) for other temporary residents
• Different rates for taxed and untaxed elements

Employment termination payments

Withholding for lump sum termination payments:

• Genuine redundancy payments (tax-free component plus concessional treatment)
• Golden handshakes and gratuities
• Payment in lieu of notice
• Varying tax rates based on preservation age and payment thresholds
• Cap amounts for concessional treatment

Closely held payees

Special arrangements for related parties:

• Includes family members, directors, and trust beneficiaries
• Quarterly reporting option available
• Withholding can be calculated on actual or estimated amounts
• Different due dates for reporting and payment
• Specific requirements under Single Touch Payroll

Contractors and no-ABN withholding

Rules for payments to suppliers without an ABN:

• Withholding at top marginal rate plus Medicare levy (47%)
• Exceptions where the supplier provides a written Statement by a Supplier
• No withholding required for private or domestic transactions
• Voluntary agreements available for contractor arrangements
• PAYG instalment options for contractors with regular clients

Compliance and penalties

Director liability

Personal consequences for company directors:

• Directors personally liable for unpaid PAYG withholding
• Director Penalty Notices issued for non-compliance
• Lockdown provisions where reporting deadlines missed
• Defence for illness or reasonable steps to ensure compliance
• Potential for administrative, civil, and criminal penalties

Non-compliance penalties

Consequences for failing to meet obligations:

• Failure to withhold: penalty equal to amount not withheld
• Failure to remit: General Interest Charge plus administrative penalties
• Late lodgement penalties based on entity size and reporting period
• Criminal prosecution for serious or deliberate non-compliance
• Potential for ATO audit activity and business reputation damage

Correction processes

Addressing errors in PAYG withholding:

• Adjustments in subsequent activity statements
• Amended payment summaries or income statements
• Voluntary disclosures to reduce penalty amounts
• Special arrangements for STP corrections
• Processes for refunding over-withheld amounts