Many businesses (particularly start-ups and small businesses) often don’t realise that there are 2 forms of pay as you go tax options: PAYG withholding and PAYG Income Tax Instalments. So what are the differences and how do they affect different businesses?
PAYG withholding refers to employees’ income and PAYG Income Tax Instalments refers to your own tax or the tax of your own company or organisation. Details on the differences between the two tax options are outlined below:
This is usually the tax that is held from a person’s wages or salary. In some circumstances, it can also be an amount that is held from suppliers to a company who have not provided adequate ABN details. All companies and organisations need to officially register for PAYG Withholding prior to holding payments. PAYG Withholding amounts are recorded on a company’s BAS and can be paid fortnightly, monthly or quarterly.
All businesses using PAYG Withholding must provide accurate statements to all employees at the end of each financial year (prior to the 14th of July) and then lodge the report to the ATO by mid-August each year.
PAYG Income Tax Instalments
Under the PAYG Income Tax Instalments system, instead of tax being held, it is paid in advance. The purpose of these instalments system is to allow businesses to plan out their tax payments by paying them more frequently (e.g. quarterly) rather than a large lump sum at the end of the financial year. Small businesses can benefit from paying their tax in advance as it allows them to manage their cash flow.
PAYG Income Tax Instalments are balanced by the ATO when lodged each financial year. If a company has paid over the required amount, then they are eligible for a refund.
It is essential that a company selects the correct tax system. Company cash flow can be directly affected if the tax system selected is not suitable.
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