The Hands-On PAYG Guide
Pay as you go also known as PAYG is a fairly new taxation phenomenon in many parts of the world. For decades, people were used to pay tax according to traditional laws and rules. PAYG has changed the tax payment system. It is the process/system which demands individuals and businesses to pay their expected tax liability for current year. The expected tax liability can be generated from investment, business or employment. The process is similar to “pay as you earn system” being used in United Kingdom.
PAYG System In Australia
Australia’s taxation system is exemplary for the whole world. Australia brought massive reforms in their taxation system in 2000 when PAYG replaced the old system. The new taxation system applies to withholding amount related to employees and all other payees in connection to regular payments from employers. PAYG taxation is being used to collect Higher Education Loan Program payments, Medicare payments and Income Tax. There are tax accountants Sydney that specialise on assisting and advisory services related to PAYG for individuals and businesses.
Calculation of annual income is done on weekly or fortnightly payment basis. Australian Taxation Office received information on appropriate level of payments and taxes. For individuals doing one job are expected to have a close figure of tax payment to what would be due actually at the end of year. Any discrepancies and deductions are always announced within annual income tax return. In Australia, individuals have tax free threshold which allows the withholding tax rate to be lower for the primary job of employee. However, other job/business is charged with fix rate by excluding tax free threshold.
Getting To Know The Process Of PAYG Payments
Let’s take a case for example in order to get better understanding of PAYG payments process. Sam received payments during a year’s time. The employer/payer must provide PAYG payment summary to Sam. What does the payment summary show? It will demonstrate total received payments and total withheld amount for the year. The payments will also include income earned from casual or part time work. Pay As You Go schedule designed by Australian Tax Office is kept as a base for calculating PAYG contributions.
Here are some of the major things to look in PAYG payment summary:
- Gross income from employer/payer
- Total tax withheld
- Employer/payer’s ABN – Australian Business Number or WPN – Withholding Payer Number
Looking Deeper Into PAYG Withholding
Withholding obligations are different from installment process. Let’s take a look from the employer’s side for PAYG withholding. Here are some factors which show that you will have withholding obligations if:
- you have permanent employees
- you have workers in form of part timers or contractors
- you have an agreement with employees/workers to withhold amounts from payment made to them
- you deal and make payments to business partners who don’t quote ABN
There are other factors which you need to take care of when involved in PAYG withholding process. The Australian taxation system makes it must for you to:
- registering for PAYG withholding
- lodge activity statements
- withhold amounts from payments and wages to employees/workers
- handover payment summaries to all payees
- provide ATO with payment summary annual report of PAYG withholding
Seek assistance from professional tax accountants Sydney with the above.
Learning About PAYG Installments
As mentioned earlier, it is the process of making advance payments towards expected income tax liability at the end of year. ATO will determine actual income tax liability while assessing individual’s annual income tax return. Finalizing PAYG installments is a must before you can lodge the income tax return. There are two options for you to choose:
- Installment Amount – With this option you are bound to pay the amount calculated by ATO. How is the amount calculated? It is calculated on basis of investment and business income from the recently assessed income tax return. The benefit of using this option is that you would always know installment amount for every quarter which could help in better planning and budgeting.
- Installment Rate – How to get this rate? The installment rate is provided by ATO. You can calculate your PAYG installment by multiplying the rate with your actual income. For individuals who expect their income to fluctuate every quarter must use this option. The installment amount paid by you will reflect your investment and business income for every quarter.
Both the options are used for calculation and paying installments. It is recommended continuing using the option which you have chosen at beginning till end of financial year. On the other hand, you can change the option after quarter of a year passes.
PAYG Installments In Comparison To PAYG Withholding
There is a slight difference between PAYG withholding and PAYG installments nature. People usually misunderstand the concept by considering both as same.
For an employer, the PAYG withholding is a legal demand from government which requires employer to keep a certain portion of payments for employees and other business partners. This portion is needed to be paid to ATO.
PAYG installments allow everybody to meet their income tax obligations in relation to their salary income or business income. The installments are usually paid by, investors, sub contractors and business owners.
The difference is not huge but it surely exists. One has to obey the taxation process in order to avoid any lawsuit.