Income tax collection

PAYG, PAYG Installments, PPS

There are three main systems of collecting tax from employees in Australia: Pay-As-You-Go (PAYG), PAYG Instalments and Prescribed Payments System (PPS) – described below.

PAYG

PAYG applies to salary and wage earners and includes superannuation and termination payments. Under the PAYG system, an employee’s tax is deducted from his gross salary at source by his employer, who forwards it to the tax office. Provided you have no income apart from your salary or wages, PAYG is designed to cover your tax liability.

Any additional income, e.g. part-time employment or income from investments or savings, whether tax is deducted at source or not, must be declared to the ATO. Nevertheless, you must lodge a tax return if you received more than $6,000 in taxable income during the financial year. You receive a credit for your PAYG payments against any tax payable.

You must give your employer your tax file number, or you could be taxed at the highest rate. If you want to receive your $6,000 tax-free allowance (and who doesn’t?), you must lodge an Employee Declaration Instalment Form with your employer; otherwise tax is deducted from all your income.

Many companies pay employees as self-employed contractors, thus avoiding fringe benefits tax, the superannuation guarantee charge and workers’ compensation. This is illegal and a risky practice for employers, who are responsible for deducting all their employees’ income tax at source unless a person is categorised as self-employed by the tax office.

The PAYG scheme is disadvantageous to employees, who in many cases would be entitled to claim larger and more allowances if they were classified as self-employed, whereby they would also have the benefit of paying their tax in arrears. For this reason, many employees disguise themselves as self-employed contractors (the practice is estimated to cost the government at least $100 million per year).

If you pay PAYG tax, make sure that the tax deducted is correct and never hesitate to dispute a tax bill with which you disagree.

PAYG Instalments

The PAYG Instalments system has replaced the Provisional Tax System and is used by taxpayers who (in a particular tax year) earn more than the amounts shown below, including over $2,000 of non-salary or wage income, e.g. in interest or other investment/business income, or who don’t pay ‘sufficient’ tax on their salary and wage income through the PAYG system. You need to pay through the PAYG Instalments system if your most recent income tax assessment shows more than $2,000 of gross investment or business income or if your most recent income tax return resulted in a tax debt of over $500. PAYG Instalments aren’t payable if your income is below the relevant threshold, shown below:

Marital Status	Threshold
Single	$37,840
Married/de facto	$58,244 (combined)
Separated	$70,404 (combined)

PAYG Instalments are payable in advance, based on an estimate of your income in the coming year and are allowed as a credit against your actual tax liability. If the advance payment exceeds $8,000, it’s paid in quarterly instalments. However, if the amount paid (based on your previous year’s income) is less than the amount assessed by the tax office at the end of the financial year, the balance owed must be paid within 30 days or by 1st February of the following year. Any shortfall between the advance payment and the amount owed must be paid within 30 days of receiving a notice of assessment from the tax office. PAYG Instalments are something of a minefield and it’s worthwhile employing a tax agent to sort it out.

PPS

The Prescribed Payments System (PPS) is a system for deducting tax from payments for certain work or services in industries that aren’t covered by the PAYG system. For example, payments to sub-contractors in the building and construction industry are covered by PPS. Under PPS, when payments are made to, for example, a sub-contractor, tax is deducted at source and sent to the tax office. This is then credited when the sub-contractor submits his tax return at the end of the tax year. The system also obliges householders to report to the tax office sums over $10,000 paid under private construction contracts.