1. PAYG and the Instalment Activity Statement
Chapter 2
PAYG and the Instalment Activity Statement

2. 2.1 What is PAYG?
Pay As You Go (PAYG) is a single, integrated system for reporting and paying withholding amounts and tax on business and investment income.
The PAYG system brings withholding obligations and income tax instalments together into one system.
The system was introduced in an attempt to simplify the overall tax collection system.
One set of rules.
One set of payment dates.
One form to fill in.

4. 2.2 PAYG Withholding System
The PAYG withholding system provides a single set of rules for businesses to collect income tax on behalf of the ATO.
Withholding is the process by which amounts are deducted from income payments made to employees.
Amounts reported on Activity Statements are:
W1 Total salary, wages and other payments.
W2 Amount withheld from payments shown at W1.
W4 Amount withheld where no ABN is quoted.
W3 Other amounts withheld (excluding any amount shown at W2 or W4).

5. Withholding Payment Dates
The dates on which withholding payments are remitted to the ATO depends on the annual amount of withholding.
Small withholders (annual PAYG withholding amounts of up to $25,000) - an amount deducted in any quarter is generally payable on the 28th of the month following the end of that quarter. The payment dates are 28 October, 28 February, 28 April and 28 July.
Medium withholders (annual PAYG withholding amount between $25,001 and $1 million) - an amount deducted in any month is generally payable on the 21st day of the following month.
Large withholders (annual PAYG withholding amounts exceeding $1 million).
An amount deducted in any period commencing Saturday and ending Tuesday is payable on the following Monday.
An amount deducted in any period commencing Wednesday and ending Friday is payable on the following Thursday.
Many non-business PAYG taxpayers (such as self-funded retirees) and some businesses will have the option of making an annual instalment.

6. Obligations of an Employer
An employer’s obligations regarding withholding tax include:
Registering for PAYG withholding.
Notifying the ATO and paying the amounts withheld, using an activity statement (or electronically in the case of large withholders).
Providing an end-of-year PAYG Payment Summary to payees.
Sending TFN declarations to the ATO.
Reporting annually to the ATO on all withholdings.
At the end of each financial year the employer who has withheld tax payments must complete a PAYG Payment Summary for each payee. The Payment Summary must be given to the payee by 14 July after the financial year.

7. PAYG Payment Summary
A Payment Summary shows the total tax payments made and the amount of tax withheld for each worker during the financial year ending 30 June. Generally, employers must:
Prepare a Payment Summary for each worker by 14 July each year (or earlier if requested).
Give the payee copy of Payment Summaries to each worker and keep a copy for their records.
If employers report their PAYG withholding information in paper form rather than electronically, they must send the original copy of each Payment Summary to the ATO as part of their annual reporting.
If employers report their PAYG withholding information electronically, they can print Payment Summaries on plain paper, but only in a format acceptable to the ATO.
If an employer is registered for PAYG withholding and reports their PAYG information in paper form, the ATO will send Payment Summaries and a personalised Payment Summary Statement around May each year.

8. 2.3 PAYG Tax Withheld and Activity Statements
Taxpayers are required to complete the PAYG tax withheld section on each Activity Statement lodged to the ATO. Withheld amounts are sent to the ATO by the due date specified on the Activity Statement.
Below is a sample of the PAYG tax withheld section of an Activity Statement.
Note: all of the following items appear on both an IAS (Types I and J) and a BAS.

9. “Gross” vs. “Net” Wages Gross is the whole amount.
Net is a part of the whole amount.
When referring to wages, the gross amount is the total wages paid based on the hours worked and rate per hour.
Net wages is the gross amount less any PAYG withheld and other deductions.

10. W1 Total Salary, Wages and Other Payments
Payment to Employees, Company Directors and Office Holders
Include at W1 total gross payments that usually require PAYG tax to be withheld.
These payments include any of the following:
Salary, wages, allowances, bonuses, commissions and leave loading paid to employees.
Directors’ fees.
Salary and allowances paid to office holders, including members of parliament, statutory office holders, defence force members and police officers.
Payments of unused leave.
Return to work payments.
Retirement and eligible termination payments.
Benefit and compensation payments.
Payments made by a labour hire firm to workers under a labour hire arrangement.
Payments to religious practitioners.
Government education and training payments.

11. W1 Total Salary, Wages and Other Payments
Do not include any of the following at W1:
Superannuation contributions.
Departing Australia superannuation payments (DASP).
Payments withheld because an ABN was not quoted (see W4).
An investment distribution that had an amount withheld because a TFN hadn’t been quoted, interest, dividends or royalty payments that had an amount withheld from for a payment to a non-resident.
Payments to foreign residents for entertainment, sports, construction.
If the taxpayer didn’t make any payments, field W1 in the activity statement should remain blank.

12. Carrying on a Labour Hire Business
If the taxpayer’s business only or partially involves arranging for people to perform work or services for clients, the taxpayer is deemed under the PAYG legislation to be carrying on a labour-hire business.
This rule does not apply if such an activity is incidental to other business activities.

13. Payments to Subcontractors
Payments by a contractor to a subcontractor are not for the performance of work directly for a client and are not subject to withholding under the labour hire provisions.
GST is not payable on the supply made by the worker to the labour hire firm.
The worker cannot claim input tax credits for any GST paid for goods or services bought and used in performing the work or services provided to the client of the labour hire firm.
If the labour hire firm is required to be registered for GST, GST will be payable on the firm’s supply to the end user.

14. Payments Made Under Voluntary Agreements
A Voluntary Agreement is a written agreement between a business and a worker to bring work payments into the PAYG withholding system. To create a Voluntary Agreement the worker, as an individual, must:
Have an Australian Business Number (ABN).
Not be subject to any other PAYG withholding.
The business will withhold tax from payments it makes to the worker and send it to the ATO.

15. Voluntary Agreements
Voluntary Agreements must contain information required by the ATO, including:
A declaration that payments made under the arrangement are subject to the Voluntary Agreement provision.
The worker’s ABN.
Indication as to whether the agreement applies to successive arrangements between the business and the worker.

16. Advantages of Voluntary Agreements
The contractor’s tax will be paid as they go.
The payer will withhold tax based on an agreed instalment amount. This is either the rate which is notified to the contractor by the ATO via the BAS or a flat rate of 20%.
As a consequence the payee does not have to make payments under the PAYG instalments system for the income received from this client.
Voluntary Agreements usually fall outside the GST system, so when the contractor invoices the client, the amount will not include GST.
Paperwork is reduced for both parties to the agreement.
The contractor can still claim GST input tax credits on business purchases.

17. Large Withholders
Entities may have a large, medium or small withholding status.
A business is treated as a large withholder if it either:
Has withheld amounts totalling more than $1 million in a previous income year, or
Is a part of a group of companies that has withheld more than $1 million in a past income year.

18. W2 Amounts Withheld from Salaries or Wages and Other Payments shown at W1
‘Withholding’ for the purposes of W2 refers to amounts deducted from income payments made to workers, and includes:
1. Payments to employees, company directors and office holders.
2. Payments under a labour hire agreement.
3. Payments under voluntary agreement.

19. PAYG Tax Withheld and Activity Statements W2 Amounts Withheld from Salaries or Wages and Other Payments shown at W1
How Much to Withhold?
Withholding from payments made to employees and others directly involved in a business should be in accordance with tax tables published by the ATO.
There are various tax tables published and take into account personal income tax rates, including the Medicare Levy, HELP debt and tax offsets.
Tax tables are provided by the ATO for payments made on a weekly, fortnightly, monthly and quarterly basis.

20. PAYG Tax Withheld and Activity Statements W4: Amounts Withheld where no ABN is Quoted
If a business does not quote an Australian Business Number (ABN) on their invoice, the business that receives the goods or services is required to withhold tax from the payment to the supplier.
Tax must be withheld if:
You are a business making a payment for goods or services and the supplier of the goods or services has not quoted their ABN.
You think the ABN quoted on an invoice may be false, or is not the real ABN of the supplier.
The supplier has made a written, signed statement that the supply is private or domestic in nature, or relates to a hobby, but you have reasonable grounds to think the statement is false.

21. PAYG Tax Withheld and Activity Statements W4: Amounts Withheld where no ABN is Quoted
The amount withheld from the payment should be at the top marginal rate plus the Medicare Levy and Temporary Budget Repair Levy (i.e. currently 49%). The supplier will be entitled to claim this withheld amount as a credit in their next income tax return.
Tax need not be withheld from a payment, even when an ABN has not been quoted, if:
The recipient is an individual and the payment is wholly private or domestic in nature.
The payment does not exceed $75 (not including GST).
The entire payment is exempt income of the supplier (for example, the supplier is a charity).
You are already withholding tax from the payment because you are an investment body paying an amount for which no Tax File Number (TFN) has been quoted.

22. PAYG Tax Withheld and Activity Statements W3: Other Amounts Withheld
In Field W3 the taxpayer must include the total amounts, if any, withheld from any of the following payments:
Interest, dividends, unit trust or other investment distributions made, where the person paid has not completed a Tax File Number declaration form or otherwise provided the taxpayer with a TFN (includes a non-resident).
Interest, dividends or royalty payments made to a non-resident.
Any Departing Australia Superannuation Payments (DASP) made.
Any payments made to foreign residents, for any of the following:
Entertainment and sport activities
Construction and related activities
Arranging casino gaming junket activities.

23. Non-Resident Withholding
Tax must be withheld from interest, unfranked dividends and royalties paid to an individual, company, partnership, trust or superannuation fund that is not a resident of Australia.
The percentage to be withheld from the gross amount is:
10% for interest.
30% for unfranked dividends, or the unfranked component of a dividend. Franked dividends have had tax withheld from them when paid so are not subject to further withholding.
30% for royalties.

24. PAYG Tax Withheld and Activity Statements W5: Total Amounts Withheld (W2 + W4 + W3)
Include at W5 the total of W2 + W4 + W3.
This amount needs to be copied to field 4 of the summary section of the activity statement.
Do not include W1 in the W5 total.

25. PAYG Tax Withheld and Activity Statements 4: PAYG Tax Withheld (Summary Section)
The amount from field W5 is to be copied to field 4 of the “Summary” section of the activity statement.
If the activity statement only asks you to report PAYG withholding, the activity statement won’t have a summary section.
The total withholding will be reported at field 9 of the “Payment or Refund” section of the activity statement.

26. 2.4 The PAYG Instalment System
The PAYG instalment system applies to taxpayers with business and investment income.
Entities Affected by PAYG Instalments include:
Individuals, such as sole traders or investors.
Companies.
Partners in a partnership.
Beneficiaries.
Trustees.
Superannuation funds.
Other entities.

27. The PAYG Instalment System
Under PAYG instalments, most taxpayers with business or investment income pay income tax instalments quarterly. Some PAYG taxpayers may choose annual payments.
Taxpayer Timing of Instalments

28. Calculating PAYG Income Tax Instalments
There are two options for most taxpayers to determine the amount of PAYG instalments and are listed on Activity Statements.
They are:
Option 1: Pay a PAYG instalment amount quarterly.
Option 2: Calculate PAYG instalment using an instalment rate.
Taxpayer Timing of Instalments

29. The PAYG Instalment System
Option 1: Pay a PAYG Instalment Amount Quarterly
Option available to:
Individuals with investment income
Trustees with investment income
Companies (if turnover less than $2 million p.a.)
Businesses (if turnover less than $2 million p.a.)
Option 1 allows the taxpayer to pay an instalment amount based on the tax assessed on their most recently lodged income tax return, adjusted in line with growth in gross domestic product (GDP). The amount is pre-printed on the Activity Statement.
If the taxpayer’s situation has changed, they may need to vary their instalment.

30. The PAYG Instalment System
Option 2: Calculate PAYG Instalment Using Instalment Rate
Taxpayers may calculate their PAYG instalments by taking their instalment rate, which is pre-printed by the ATO on the Activity Statement, and multiplying it by their instalment income.
PAYG Instalment = Instalment income x Instalment rate
Companies and superannuation funds with business and investment income of more than $2 million must use this option.

31. 2.5 PAYG Instalments and Activity Statements
Taxpayers are required to complete either:
■ Option 1: Pay a PAYG instalment amount quarterly.
■ Option 2: Calculate PAYG instalment using income times rate.
on each Activity Statement lodged with the ATO.

32. Option 1 T7 ATO Instalment Amount
T7 will show an amount worked out by the ATO. This amount is calculated based on the taxpayer’s income tax liability from the previous year.
If the taxpayer wants to pay this amount, the amount must be copied to field 5A (PAYG income tax instalment) on the activity statement.
However, if the taxpayer thinks that using the pre-printed amount at T7 will result in paying more or less tax than expected for the year, the taxpayer can vary it. To vary the instalment amount, fields T8, T9 and T4 must be completed.

33. Option 1 T8 Estimated Tax for the Year
If the taxpayer wants to vary their PAYG instalment amount, they must first estimate the tax they expect to pay on their business and investment income for the year. This must be written at field T8.
If the taxpayer varies the instalment amount and, as a result, pays less than 85% of the actual tax liability for an instalment period, they may incur a GIC.
The ATO works out the instalment rate when they assess the taxpayers’ income tax return based on:
Gross business and investment income.
The tax attributable to that income (excluding capital gains) for the year.

34. T9 Varied Amount for the Quarter
Option 1
T9 Varied Amount for the Quarter
Use the following Table to calculate the amount at T9:

35. Option 1 T4 Reason Code for Variation
If the taxpayer varies their PAYG instalment amount, they must tell the ATO why.
The taxpayer must choose the reason from the following list:
Change in investments
Current business structure not continuing
Significant change in trading conditions
Internal business restructure
Change in legislation or product mix
Financial Market Changes
Use of Income Tax losses

36. Option 1
5A PAYG Income Tax Instalment (Summary Section) The amount recorded at T9 is then copied to 5A (PAYG Income Tax Instalment) of the Summary Section of the Activity Statement.
Example: 5A
Complete label 5A of the Summary Section for Asta.
The varied instalment amount for Asta, as calculated previously (Example T9), is $3,000.
Therefore, the amount at 5A is also $3,000.

37. Option 2 T1 PAYG Instalment Income
Instalment income for the quarter is written at T1. If there isn’t any instalment income for the period the taxpayer will write ‘0’.
Inclusions:
Gross sales and fees received for services provided.
Interest received or credited to the bank account.
Gross rent (excluding GST on commercial rent).
Dividends paid or reinvested on the taxpayer’s behalf – do not include franking credits.
Royalties.

38. Option 2 T1 PAYG Instalment Income
Inclusions (cont.):
Gross amount of income where tax has been withheld because the taxpayer did not provide their TFN or ABN.
Foreign pensions that are assessable in Australia.
The taxpayers proportion of any partnership or trust income.
Withdrawals from farm management deposits - if the taxpayer makes a farm management deposit, there instalment income for that period is reduced.
Fuel Tax Credits (FTC).

39. Option 2 T1 PAYG Instalment Income
Exclusions:
GST, Wine Equalisation Tax (WET) or Luxury Car Tax (LCT) collected.
GST credits.
Any income
Loans received.
Owner’s capital.
Grants under the energy grants credits scheme,
Amounts transferred between accounts.
Franking credits.
Exempt income such as the family tax benefit or child care benefit payments.

40. Option 2 T2 Instalment Rate
The rate pre-printed at T2 will be either:
The instalment rate worked out by the ATO.
The taxpayer’s most recent varied rate, if the instalment rate was varied in a previous quarter of the same income year.
The ATO calculates and advises the instalment rate based on information from the taxpayer’s last assessed income tax return. The formula is:
Instalment Rate = Notional Tax X 100
Instalment Income
Notional tax as determined by the ATO is equal to the prior year’s income tax payable.

41. Option 2 T3 New Varied Rate
If the taxpayer thinks that using the pre-printed rate will result in paying significantly more (or less) tax than the expected tax for the year, the taxpayer can vary it.
To vary the instalment rate, the taxpayer must fill in fields T3 and T4 of the activity statement.
The new varied rate is determined by the following formula:
Varied Rate = * Estimated income tax for the year X 100
Estimated Instalment income for the year
* Excluding GST

42. Option 2 T11 = T1 x T2 (or T1 x T3)
Multiply the PAYG instalment income (amount at T1) by either:
The ATO’s instalment rate pre-printed at T2.
If you vary the rate, your new varied rate that you wrote at T3.

43. T4 Reason Code for Variation
Option 2
T4 Reason Code for Variation
Refer to the Table of Variation Codes previously provided under Option 1-Instalment Amount.
Example: T4
Rory should apply the new varied rate as calculated above because the
internal restructure of his business is likely to significantly affect his annual tax liability. Determine the variation code.
Solution
The relevant variation code at T4 is 24 (Internal business restructure).

44. 2.6 Completing Instalment Activity Statements
An Instalment Activity Statement (IAS) is a single form the taxpayer completes and returns to the ATO to report the following obligations and entitlements:
Pay As You Go (PAYG) amounts withheld from payments to others.
PAYG instalments.
Fringe Benefits Tax (FBT) instalments.

45. Who Should Use an Instalment Activity Statement?
Taxpayers required to lodge an IAS with the ATO include:
Individual taxpayers with investment and/or business income.
Trustees with business income.
Businesses (including companies) not registered for GST.
Businesses which are on a monthly reporting cycle for PAYG withholding

46. Preparing the IAS
The ATO sends the IAS to taxpayers before they need to lodge it. The statement is personalised, with some parts already completed to save time and effort.
Each activity statement has a unique document identification number, which is shown on the front of the IAS.
The document ID is used by ATO systems to identify the activity statement during processing.

47. Instalment Activity Statements Types of Instalment Activity Statement
There are four types of IAS. These are:
IAS N for taxpayers who have elected to report and pay an annual PAYG income tax instalment.
IAS I for taxpayers with PAYG tax withheld only (quarterly or monthly).
IAS B for taxpayers with a PAYG income tax instalment obligation only.
IAS J for taxpayers with PAYG income tax instalment, PAYG tax withheld and FBT obligations.

48. IAS Type N

49. IAS Type N

50. IAS Type I

51. IAS Type B

52. IAS Type J