4.7.5.20 Pay As You Go (PAYG) Tax System

Summary

This topic contains information on:

  • the PAYG tax system,
  • PAYG instalments,
  • instalment activity statements, and
  • PAYG withholding.

Detailed information on these topics can be obtained from the Australian Taxation Office.

PAYG tax system

From 1 July 2000 a single PAYG system replaces 11 existing reporting systems, including pay as you earn (PAYE), prescribed pre-payments system (PPS), provisional tax and the company superannuation fund systems.

PAYG is a single integrated system for reporting and paying withholding amounts and tax on business and investment income. The system brings income tax instalments and withholding tax obligations together in one system, which for most businesses means one set of payment dates and one form to complete.

There are 2 elements of the new system: PAYG instalments and PAYG withholding.

PAYG instalments

PAYG instalments replace provisional tax and company tax instalment systems.

Under PAYG, income tax instalments are based on current trading or income conditions and are paid after the income is earned. Individuals, including sole traders and companies, will pay their instalments at the same time as each other.

As PAYG abolishes provisional tax, it may also affect people with investment income who are not in business, such as self-funded retirees. People affected lodge instalment activity statements.

Instalment activity statements

Individuals with investment income who were previously in the provisional tax system may be required to use the PAYG system to pay their taxation instalments. Before 1 July 2000 the ATO will have advised people who are required to complete instalment activity statements.

Example: A self-funded retiree.

Under PAYG, income tax instalments will be based on current income conditions (not the previous year's) and will be paid after the income is earned. If a person earns more - they will pay more. If they earn less - they will pay less.

Instalments will be paid using an instalment activity statement, usually on a quarterly basis. They may be paid annually where the 1999-00 notional tax payable was less than $8,000.00

The instalment activity statement is used for taxation purposes to measure a person's taxable income. It is NOT used to assess income for social security purposes. Income for social security purposes includes gross income from all sources and includes items such as valuable consideration (1.1.V.25) and capital payments that are not taxed.

Act reference: SSAct section 8(1)-'income amount'

Policy reference: SS Guide 4.3 Ordinary Income

PAYG withholding

PAYG withholding replaces the various withholding systems including PAYE, PPS, reportable payments system (RPS) and dividend, interest and royalty withholding tax for non-residents.

Businesses that provide goods and services to other businesses will have to quote their ABN or risk tax at a rate of 48.5% being withheld from payments made to them.

Businesses use a business activity statement to report all ongoing business tax obligations.

Although both PAYG and GST amounts can be recorded on the same business activity statement they are distinct taxation requirements.

Policy reference: SS Guide 4.7.5.30 Business Requirements & Fringe Benefits

Voluntary agreements to enter the PAYG system

Businesses and some self-employed people may enter into PAYG voluntary agreements to bring the individuals into the tax withholding system when no other PAYG withholding applies.

This means that the business deducts amounts from payments to the individuals and remits them to the ATO to help the individuals meet their annual income tax liability. The individuals must have ABNs to enter into voluntary agreements.

Taxation refund

An ATO tax refund is not considered income as the refund is a return of a person's money paid to the ATO and previously assessed as part of the person's gross income.

This is similar to the treatment of GST refunds (4.7.5.30) that are reimbursements of monies paid to the ATO and previously assessed as part of business income. Also, the refund is similar to a reimbursement of costs, a return of money assessed before the person paid the costs or expenses.

Policy reference: SS Guide 4.3.2.10 Income received to cover specific expenses, 4.7.5.30 Business Requirements & Fringe Benefits

Last reviewed: 17 August 2015