What is PAYG withholding, and how does it affect my salary?

In Plain English

PAYG withholding, or "Pay As You Go" withholding, is a system where amounts are taken out of your salary or wages throughout the year to cover your income tax, Medicare levy, and any income-contingent loan repayments (like HECS/HELP).

Here's how it works:

  • Your employer takes a portion of your pay before you receive it.
  • This amount is sent to the Australian Taxation Office (ATO).
  • At the end of the financial year, these withheld amounts are credited against your total tax liability. If you've paid too much, you'll get a refund. If you haven't paid enough, you'll owe the ATO the difference.

Detailed Explanation

The Pay As You Go (PAYG) system is established under the Taxation Administration Act 1953. It's designed to ensure the efficient collection of income tax and Medicare levy, as well as amounts for liabilities under the Higher Education Support Act 2003 and the VET Student Loans Act 2016, as stated in section 11-1.

PAYG has two components, as per section 6-5(1):

  • PAYG withholding (Part 2-5): This involves amounts being withheld from specific types of payments or transactions. Typically, the entity making the payment is responsible for withholding the amount and remitting it to the Commissioner, as described in section 6-5(2) and section 10-1.
  • PAYG instalments (Part 2-10): These are direct payments made to the Commissioner, usually based on a taxpayer's GDP-adjusted notional tax or ordinary income from a previous period, excluding income subject to PAYG withholding, exempt income, or non-assessable income, as stated in section 6-5(3).

How PAYG Withholding Affects Your Salary:

Under PAYG withholding, your employer is generally required to withhold an amount from your salary or wages and remit it to the Commissioner section 6-5(2). The amount withheld is determined by withholding schedules specified by the Commissioner under section 15-25 of Schedule 1 to the Taxation Administration Act 1953. These schedules take into account factors such as your income, any tax offsets you've claimed, and Medicare levy adjustments Chunk 6.

Section 46(8) of the Child Support (Registration and Collection) Act 1988 also notes that the amount of salary or wages is taken to be the amount after amounts required to be withheld under Part 2-5 in Schedule 1 to the Taxation Administration Act 1953 have been withheld.

Variations to Withholding:

In certain circumstances, the Commissioner has the power to vary the amount required to be withheld section 15-15. Several legislative instruments outline specific withholding variations for certain classes of cases. For example:

Credits and Refunds:

You are entitled to credits for the amounts collected under the PAYG system. These credits are applied against your tax debts, and any excess is refunded to you, as stated in section 6-10.