What is PAYG withholding in Australia?

Pay As You Go (PAYG) withholding is the system through which Australian employers collect income tax on behalf of the ATO from employees, contractors in specific circumstances, and recipients of certain other payments. Understanding your obligations as an employer is critical to remaining compliant.

Who must register for PAYG withholding?

You must register as a PAYG withholder if you: - Pay wages or salaries to employees - Make payments to closely held payees (e.g., directors or family members who are also shareholders) - Engage contractors who do not quote their ABN - Make payments of dividends, interest, or royalties to foreign residents

Registration is done through the ATO Business Portal or by contacting the ATO when you commence hiring employees.

How much to withhold

The amount to withhold from each payment depends on: - The payee's tax file number (TFN) — if an employee does not provide a TFN, you must withhold at the top marginal rate of 47% - Whether they have claimed the tax-free threshold — if an employee claims the threshold on their Tax File Number Declaration form, their withholding is lower - Whether they have any additional HELP/HECS debt — employees with student loan debt have additional withholding applied - Whether they are a resident or non-resident for tax purposes — non-residents have higher withholding rates

The ATO publishes tax withholding tables and online calculators to determine the correct withholding amount for each pay period.

Single Touch Payroll (STP)

From 1 July 2019, all employers must use Single Touch Payroll. STP is a government initiative where payroll software reports wages, tax withheld, and super information to the ATO digitally at each pay event. Under STP, you no longer provide employees with a paper payment summary at year end. Instead, employees access their income statement through myGov.

Reporting and paying withheld tax

You report and pay PAYG withholding through your BAS: - Large withholders (over $1 million in annual withheld amounts): remit within 5 days of each payday - Medium withholders ($25,000-$1 million annually): remit monthly, reported on the BAS - Small withholders (under $25,000 annually): remit quarterly, reported on the BAS

The amounts withheld must be paid to the ATO regardless of whether you pay them to your employees — withholding and not remitting is a criminal offence.

Contractors without an ABN

If you pay a contractor who does not quote their Australian Business Number (ABN), you are generally required to withhold 47% of the payment. Always request an ABN from any new contractor before making the first payment.

Director penalty notices

Company directors have personal liability for unpaid PAYG withholding. If a company fails to remit withheld amounts, the ATO can issue a director penalty notice (DPN), making directors personally liable for the debt. This personal liability is one of the most serious tax risks for company directors.

PAYG withholding vs. PAYG instalments (the distinction)

There are two related but distinct systems: - PAYG withholding: Employers withhold tax from employee wages and remit to the ATO - PAYG instalments: Individuals or entities with business or investment income pay quarterly instalments of their own expected tax liability throughout the year

A company director may have both obligations: the company handles PAYG withholding for employees, and the director may personally need to pay PAYG instalments on their own investment or business income not subject to withholding.

Taxable Payments Annual Report (TPAR)

In addition to the BAS, certain industries (building and construction, cleaning, couriers, IT, security, road freight, and others) must lodge an annual Taxable Payments Annual Report (TPAR) by 28 August each year. The TPAR reports all payments made to contractors and subcontractors and is used by the ATO to cross-reference contractor income declarations.