If you are an employer or own a self-managed superannuation fund (SMSF) you may be required to register for Pay As You Go (PAYG) withholding.

PAYG is a withholding tax that requires the payment of incremental amounts of your business's income to the ATO, in order to slowly accumulate towards your expected end of year income tax liability.

You should always finalise your year's PAYG instalments before lodging your income tax return, to ensure that the contributions you have paid throughout the year are taken into account during your income tax assessment.

PAYG obligations for business owners

As a business owner, you may also have an obligation under the PAYG withholding rules to collect tax from employee payment and any payments made to certain businesses. This withholding obligation is designed to ensure that they, too, will meet their end-of-year tax liabilities.

You have a withholding obligation as a business owner if:

  • You're an employer
  • You hire other workers, such as contractors, and voluntarily agree with them that you will withhold amounts from your payments to them
  • You make payments to businesses that do not quote their ABN

You will start the PAYG process by registering for PAYG withholding, which will require you to first register an ABN for your business if you have not already done so, then use the ABN to register for PAYG withholding. This process can be completed through a registered tax agent or BAS agent, or online through the Business Portal on the ATO website.


Payments which require PAYG withholding

Payments to the following are typically subject to PAYG withholding:

  • Employees
  • Directors
  • Business which did not quote their ABN to you
  • Contractors you have entered into a voluntary agreement with regarding withholding
  • Business that operates as either a sole trader or as a partnership, and which draw amounts from the business, will not be required to withhold from these payments. This is because such payments are not considered a wage.

When and how to stop PAYG withholding

If an employee leaves, retires, or otherwise ceases employment with you, a contractor under a voluntary agreements ceases their contract with you, or a business that did not quote their ABN stops doing business with you:

  • Make any required final PAYG withholding payments on the employee or contractor's behalf
  • Complete an employment termination payment (ETP) form (if applicable)
  • Keep on record the employee's TFN declaration till the end of the next financial year
  • Keep record of the PAYG withholding for all employees, contractors, and businesses

You may also stop withholding if you should cease as an employer (in which case you should cancel your PAYG withholding registration) or if you cease operating your business (in which case you may wish to cancel both your ABN and PAYG registrations.) You must have lodged any outstanding activity statements and met all your outstanding PAYG withholding registration obligations.


PAYG obligations for SMSFs

If you are the trustee of a self-managed super fund (SMSF), you may also have PAYG obligations. Such obligations would relate to withholding tax for superannuation benefit payments you pay to members who meet the following qualifications:

  • Are under 60 years old, and whose benefit is an income stream (pension) or a lump sum
  • Are 60 years old or over and the benefit is a pension which is a capped defined benefit income stream (including life expectancy and market linked pensions which were payable before 1 July 2017, and reversionary income streams paid to beneficiaries)
  • Are under 60 years old, and the death benefit is a pension from a capped defined benefit income stream where the deceased was 60 years old or over when they died (a member's defined benefit income cap may need to be considered when calculating withholding)

You may also be obligated to withhold tax from superannuation benefits you pay to:

  • The trustee of a deceased estate
  • A non-dependant (in the event of another person's death)

You will need to register for PAYG withholding and obtain a tax file number declaration (TFN) from the member (otherwise tax must be withheld at the top marginal rate.) Withheld amounts must be paid to the ATO, and a PAYG payment summary issued to the recipient of the benefit.

Each pension payment summary should include full details of the payment such as:

  • Tax-free and/or taxable components
  • tax offset and/or tax withheld (if applicable)

Payment summaries should also be issued in the situations listed above even if no tax has been withheld. For lump-sum payments, you must provide the recipient with a PAYG payment summary for the superannuation lump sum within 14 days of making the payment.

Tax need not be withheld if:

  • The member is 60 years old or over, and the income stream benefit is not a capped defined benefit income stream
  • The member has a terminal medical condition
  • The member is decreased, and the benefit is paid to a dependent beneficiary as a lump sum
  • The member is deceased, the income stream benefit paid to a dependent beneficiary is not a capped defined benefit income stream, and either the dependant or member were 60 years old or over

Managing PAYG withholding for a business or a SMSF can be complex. Contact us today for advice on managing your employee or SMSF PAYG withholding or instalments.


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