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PAYG Withholding - The Details

When you manage your own business and take on staff, there are many things that need to be considered and if you are a first time employer, this can be quite an overwhelming task. One important responsibility you take on when hiring staff is to ensure your employees meet their end-of-year tax liabilities by collecting Pay As You Go (PAYG) Withholding amounts regularly from their gross wages.

There is another PAYG system called PAYG Instalments which is a pre-payment for the business for it’s own corporate income tax obligation.

However below we summarise the ins and outs of PAYG Withholding, covering the registration process right through to the end of year lodgement.

Contents

Payments to withhold from

Generally, tax is required to be withheld not only on wages and salaries paid to employees but also on the payments listed below:

  • Allowances
  • Director payments
  • Back payments, commissions, bonuses and similar payments
  • Long service leave and holiday pay
  • Repayment of an over payment
  • Payments when an employee leaves

Registering for PAYG Withholding and the Withholding Cycle

Before you’re first required to make a payment that is subject to withholding, you must register your business for PAYG Withholding with the Australian Taxation Office (ATO). If your business has an active ABN, PAYGW registration can occur via the following avenues:

  • By logging in to the ATO’s Online services for business platform
  • Contacting your registered tax agent or BAS agent (BLG Business Advisers) and requesting they register on your behalf
  • Using your Standard Business Reporting (SBR) compatible software
  • By phoning the ATO’s business line if you’re an authorised business contact

When registering, you will also be required to select a withholding cycle period, whereby PAYG Withholding is reported to the ATO on either a quarterly, monthly OR weekly basis.

Where an employer’s annual withholding amount is:

  1. $25,000 or less (small withholder status) – you are required to notify and pay quarterly
  2. More than $25,000 and upto $1 million (medium withholder status) – you are required to notify and pay monthly (Due by the 21st of the next month)
  3. More than $1million (larger withholder status) – you are required to pay within six to eight days of the withholding event taking place i.e. when staff are paid

Should your circumstances change and your annual withholding move from one withholder status to the next, requesting to change your withholding cycle is relatively straight forward. This can be done through the online services for businesses OR online services for agents secure mail options.

Tax file number and withholding declarations

You need to ensure that a tax file number declaration is completed for each of your employees when they commence their employment. This form is required to be lodged with the ATO and can now be done online using either online services for Business OR through your accounting or payroll software (which has to have Standard Business Reporting enabled). This form is important as it allows the employee to:

  • Advise you of their tax residency status
  • Advise you as to whether they wish to claim the tax free threshold on employment income
  • Advise you of any changes to study and training support loans such as Higher Education Loan Program (HELP), Trade Support Loan (TSL) or Financial Supplement debts.
  • Claim entitlements to tax offsets by having a reduced amount withheld from payments made to them

Annual reporting

Following the introduction of mandatory Single Touch Payroll (STP) Reporting for all employers, gross wages and PAYG Withholding is now required to be finalised at the end of the financial year through their respective accounting or payroll software.

As this report is directly sent to the ATO, it is imperative, prior to making your finalisation declaration, that the STP information being submitted is reviewed and correct. Essentially, the gross wages and PAYGW in the finalisation report should match with the payments made to the employees throughout the year.

This report is required to be reported to the ATO prior to 14th July each year. If you do not finalise by this date, you should do this as soon as possible to ensure your employees can access their information to complete their income tax return.

Made a mistake with an employee’s PAYG Withholding?

Don’t stress!!!

If the error is discovered early (within the financial year), the extra amount withheld can be refunded to the payee and amended in a subsequent pay run even if the amount has already been reported and paid to the ATO.

If the error is discovered later than 30 June (after) the end of the year in which the withheld amount relates), do not refund the amounts to your payee – if you do the ATO cannot refund this amount to you. To rectify this you will need to lodge an update event through your accounting or payroll software and notify the employee/(s) respectively of any changes, as they may need to correct their tax return.

If you cannot lodge an update event with the correct details straight away, an update event with the original information should be lodged with the ATO and the finalisation indicator removed. Doing this will advise the ATO that the current information is not final and shouldn’t be used to pre-fill your employees’ individual tax returns.

It is important to note that errors must be corrected within 14 days of detection or, if your pay cycle is longer than 14 days (for example, monthly), the error should be rectified by the date you would be due to lodge your next regular pay event.

Please keep in mind, once the update event is lodged, you will also be required to review your wages and PAYGW within the appropriate Business Activity Statement (BAS) or Instalment Activity Statement and lodge the update accordingly.

If you would like help with PAYG or have other business matters you would like to discuss please make sure you talk with us about your situation. BLG Business Advisers are Wollongong Accountants who service all across Australia, so our team are always available to guide you and will provide solutions that are specific to your needs.

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*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is correct at the time of publishing and is subject to change*
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