Pay-As-You-Go (PAYG)

Contributed by AnnetteMorgan and current to 27 July 2018

The Pay-As-You-Go (PAYG) system consists of three separate parts:

1. a PAYG withholding system;
2. a PAYG instalments system; and
3. an extension of the ATO running balance accounts to enable a single ATO statement across all of a taxpayer’s tax liabilities.

PAYG instalments

If you are a business, corporate or individual taxpayer it is likely that you will be liable to remit PAYG instalments to the ATO on a quarterly basis – usually within 28 days after the end of each quarter. If you are not registered for GST and the ATO has notified you that your “notional tax” is less than $8,000, you may choose to pay an annual instalment on 28 October after year-end.

Under PAYG, tax instalments are based on current trading or income conditions and are paid after the income has been earned. The ATO will provide you with an instalment rate, which is essentially the tax payable as a percentage of your gross business and investment revenue. You are then required to apply this rate to your actual quarterly gross revenue (instalment income) for the purposes of calculating the appropriate PAYG instalment for a particular quarter.

If you are an individual who is not registered for GST, you may choose to base your quarterly PAYG instalments on your income tax liability for the previous year (excluding capital gains), which is then adjusted for movements in the Gross Domestic Product (GDP).

If you are an entity paying annual instalments, you may apply the Commissioner’s instalment rate to your instalment income for an income year or, alternatively, you may pay an amount which you estimate to be your benchmark tax for an income year.

You are entitled to vary the amount of your quarterly instalments by varying the instalment rate given to you by the ATO. Where you vary the rates, you must notify the Commissioner of the chosen rate, and you must use the new rate in calculating your instalments for the remainder of the financial year. Where your chosen rate is lower than the rate given to you by the Commissioner, you will be entitled to a credit in respect of any previous instalments. If your chosen rate results in an instalment which is less than 85 per cent of the benchmark instalment rate calculated by the Commissioner, a general interest charge (GIC) will apply (see “Penalties and offences relating to tax returns”).

PAYG withholding

Payments and transactions covered by PAYG withholding are called withholding payments. PAYG imposes an obligation on an entity making a withholding payment to withhold and pay an amount to the Commissioner. The PAYG withholding system applies to 24 specific kinds of payments and transactions. Withholding payments generally fall into one of the following categories:

• payments for work or services – this includes payments of salary and wages;
• benefit and compensation payments;
• payments on investments;
• dividend, interest and royalty payments;
• mining payments;
• non-cash benefits;
• payments to a worker from a labour hire firm (for work performed for a client of the labour hire firm;
• payments made to foreign residents engaged in certain activities;
• payments covered by a voluntary agreement, in the approved form, to an individual who has an Australian Business Number (ABN); and
• payments for supplies between two businesses where the recipient of the payment does not quote an ABN on the invoice.

The method and rates for calculating the amounts to be withheld under the PAYG system are specified in regulations issued by the Commissioner.