This blog was inspired by a client who couldn’t understand why they had to register for GST when in their mind they were already paying tax…which turned out to be PAYG Instalments.
The taxes below are reported and lodged through the Business Activity Statement (BAS). You can find more information on the BAS in my blog “How does the Business Activity Statement work?”
Goods and Services Tax (GST)
This tax is charged on the sale of goods and services where:
- the seller is registered for GST,
- the goods or services are not exempt from GST (such as basic food items, some educational services, some medical services)
- your enterprise is connected with Australia
When you register for GST, you have to charge your clients 10% on top of what you usually charge. For instance, if you sell a book for $60, you need to charge your customer $66. You keep your $60 and tuck the $6 to the side to pay the Australian Tax Office (ATO) through the BAS.
When you purchase things for your business from a GST registered entity, you can claim back the GST they charge you. For instance, if you buy a printer for $275 from Officeworks, you effectively only pay $250 as you are credited back the $25 GST they charge you.
Using the above two scenarios, the figures to use when you lodge your BAS are:
$6 GST Collected (you owe this to the ATO)
-$25 GST Paid (the ATO owes you this)
-$19 refund from the ATO
Pay as You Go Withholding tax/PAYG Withholding tax (PAYGW)
This typically applies to when you have employees, but can also apply if you are paying directors or office holders such as the company secretary. In some instances, contractors may also enter into a voluntary agreement to withhold tax. The purpose is to withhold tax to help them meet their future tax liability.
For example, you pay your employee $50 an hour and they have worked 20 hours. Easy calculation: 20 hours x $50 = $1000 gross. However, your accounting software will calculate how much PAYGW you need to withhold – lets say $150.
$1000 gross, shows on your profit and loss statement
-$150 tax withheld, shows on your balance sheet
$850 is paid directly to your employee
The $150 is reported and paid to the ATO through your BAS. At the end of the financial year, when your employee does their tax return, they will have paid tax already up front. That is why it is called Pay as You Go. Tax is withheld on every pay event, unless the employee earns under the threshold.
If the employee has paid more tax than they needed to, they will get a tax refund. If they haven’t paid enough tax, they will have to pay the shortfall.
Pay as You Go Instalment/PAYG Instalment (PAYGI)
This is similar to the tax being withheld above, but in this instance, it is withheld to meet the future tax liability of the business. Annoyingly, it is also called Pay as You Go but uses Instalment instead of Withholding in its name.
The two methods of calculating this tax are:
- An amount is decided by the ATO based on the previous tax return lodged. This amount is divided by 4 and paid each quarter through the BAS.
- A percentage is decided by the ATO, again based on the previous tax return lodged. The reporting periods income is multiplied by this percentage
Of course, your income isn’t always the same year to year – you might sell part of your business or downsize, a disruptor may enter the market (think ridesharing services) or a pandemic may hit!
Thankfully, you can vary the PAYGI you pay. However, you should be careful not to understate your PAYGI too much as there are penalties if the total declared is less than 85% of the total by the end of the year. This problem can generally be avoided as you can make a balancing payment in the last BAS of your financial year.
