Pay As You Go (PAYG) System. The Australian Taxation Office's (ATO) system for regularly collecting income tax on earnings during the year.PAYG system has 2 limbs:-PAYG withholding system; and PAGY instalment system. PAYG Withholding System. Businesses who are employers are required to withhold
1. PAYG System Source: Tax Procedures for your business by Ian Birt
2. Pay As You Go (PAYG) System The Australian Taxation Offices (ATO) system for regularly collecting income tax on earnings during the year.
PAYG system has 2 limbs:-
PAYG withholding system; and
PAGY instalment system
3. PAYG Withholding System Businesses who are employers are required to withhold income tax from payments to payees.
Payees include employees but can also include directors, contractors.
Essentially the business acts as a collecting agent for the ATO with respect to income tax payable by the payee
4. PAYG Withholding System For example, with regards to employees, the ATO wants to receive the employees income tax in advance rather than waiting until the employee submits their tax return at the end of the financial year. The business (employer) is obligated to collect this prepaid income tax from the employees wage.
The employee can claim any PAYG tax that was collected by the employer during the year as a tax credit from their annual income tax return for the year.
5. Payments covered Payments of remuneration to employees
Payments of directors fees
Payments to contractors under voluntary agreements
Payments for labour services under labour hire arrangement
Workers compensation payments
Payments for supply of goods and services where the payee does not quote an ABN
Investment income payments by investment
bodies to investors who do not quote a TFN
Dividend, interest, or royalty payments to a non-resident
6. Payments to employees Includes wages, salaries, allowances, bonuses, commissions, leave entitlements.
Drawings by owners NOT included
Amounts to be deducted from payments to employees are specified in withholding schedules
7. Payments to contractors under voluntary agreements Payer and payee voluntarily agree to have the PAYG withholding system apply.
Amount withheld is the ATO notified instalment rate or 20% whichever is greater.
Certain requirements must be met see pg 43
8. Payment for labour services under labour hire arrangements The business contracts a labour hire firm to provide the business with workers.
The business pays the labour hire firm. The labour hire firm pays the workers.
The worker is neither an employee of the labour hire firm nor the business payer.
The labour hire firm must withhold tax from payments to workers
9. Workers compensation As per payments to employees
10. Payments for the supply of goods or services where the payee does not quote an ABN Payer must withhold 46.5% of the payment unless:
The goods were bought for private or domestic purposes
The payment is < $50
The supplier was an individual engaged in a hobby activity.
See examples pg 46
11. Investors who do not quote a TFN Investment bodies must withhold 46.5% of any payment of interest, dividends etc.
12. Payers obligations Register
Receive TFN declarations from payees and send to ATO
Withhold PAYG tax from payments to payees
Send PAYG tax withheld to ATO at regular intervals (on BAS statement)
Issue payment summaries to payees at the end of the income year
Send annual report to ATO at the end of the income year.
13. Registration A new business registers when they apply for an ABN
14. Receiving TFN declarations See example of declaration pg 49
15. Withhold PAYG tax Look at example on pg 50-51
Do exercise on handout.
16. Send PAYG withholding to ATO Reported on either the business activity statement (BAS) or instalment activity statement (IAS)
Payments are made either electronically, by mail, or at the Post office.
17. Issue payment summaries to payees Issued at the end of the income year (30 June)
Show the total gross payment, total tax withheld, allowances, lump sum payments and fringe benefits
See example pg 52
Must be issued by 14th July (within 14 days)
18. Send annual reports to the ATO To be sent to the ATO by 14th August
19. Non Compliance Penalties Take note of penalties on pg 53
Do exercises on pg 53
20. PAYG Instalment System Applies to taxpayers with business and/or investment income.
Taxpayers pay their own income tax to the ATO by regular instalments
(differs from PAYG withholding where payers withhold tax from payments to others)
Instalments paid are prepayments of income tax before their tax returns are lodged for the income tax year.
21. PAYG Instalment System Instalments are based on what the expected income tax liability will be at the end of the tax year.
Once the tax year is complete and the final tax is calculated, any instalments paid during the year are deducted from the amount of tax payable.
22. Eligible taxpayers Sole traders, partners
Individuals with investment income (if they had >$1000 of business or investment income in prior year tax return AND prior tax assessment was > $250)
Trustees and beneficiaries of some trusts
23. Eligible taxpayers Taxpayers will be notified in writing by ATO at start of the income year if they have to pay instalments.
ATO will calculate an instalment rate.
24. Quarterly PAYG Instalments Three options available:-
Instalment income X instalment rate option;
GDP adjusted notional tax option; or
ATO instalment amount option
25. Instalment income x instalment rate option Taxpayers apply the instalment rate option calculated by the ATO to their gross business or investment income for the quarter
See pg 63-65
Note what is included and not included in instalment income pg 64
Note how ATO calculates the instalment rate pg 65
Taxpayers have option of varying their instalment rate.
26. GDP adjusted notional tax option Instalments are based on their GDP adjusted notional tax
Notional tax is the income tax assessed as per last years return.
Notional tax is increased by an ATO specified rate to allow for economic growth.
Taxpayer must elect to pay under this option
The instalment amount is then preprinted on the BAS or IAS.
27. ATO instalment amount option ATO calculates an instalment amount each quarter based on the income shown in last years tax return.
Only available to:-
Partners of partnerships
Companies/superfunds with annual turnover < $1,000,000
28. Reporting and payment of instalments Paid quarterly on the BAS return or IAS return.
29. Annual PAYG instalments Some taxpayers have option to pay annually.
See pg 67
30. Problems Try 4.1 and 4.2 of practical problems pg 71-72