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  • Work out any additional PAYG withholding amounts

    Your business needs to work out any additional PAYG withholding amounts for each business activity statement (BAS) for the attributed income only.

    It can sometimes be difficult for businesses to accurately work out the attributed income amount each time their BAS is due so we've introduced two simplified methods to help you.

    If you intend to pay the whole of an individual's net PSI as salary and wages, these two methods can also be used to work out a reasonable salary amount for PAYG withholding purposes.

    The two simplified methods of calculating attributed income for withholding purposes:

    • 70% of the gross PSI received in the PAYG payment period
    • a percentage of the net PSI from the previous income year.

    If you would prefer to work out the actual amount of PSI and additional PAYG withholding amounts for the BAS period, your business can still use this method. This method is known as the ‘legislative method'.

    The legislative method allows you to more closely match your PAYG withholding obligations with your current PSI and expenses. However, you may be penalised if your calculations are incorrect and you end up not withholding enough tax.

    If you correctly use either of the two simplified methods, you will not be penalised if, at the end of the income year, you work out that you withheld less tax than you should have.

    Next step:

    Work out your additional PAYG withholding amounts using one of the methods:

    Example: working out PAYGW obligations

    Claire is a computer programmer who operates through her company Claire's Computer Programming Services Pty Ltd. In the first quarter (1 July to 30 September), Claire (on behalf of the company) completed three contracts which generated $100,000 PSI (GST exclusive). The company did not earn any other income.

    The company has worked out the PSI rules apply to the PSI and the company is registered for PAYG withholding.

    For the $100,000 PSI, Claire's Computer Programming Services Pty Ltd has:

    • promptly paid $30,000 to Claire as salary or wages
    • incurred $10,000 in allowable deductions (other than entity maintenance deductions)
    • attributed $60,000 ($100,000 - $30,000- $10,000) to Claire, as she was the individual who produced the PSI.

    Claire's Computer Programming Services would have:

    • additional PAYG withholding obligations for the $60,000 attributed to Claire
    • normal PAYG withholding obligations for the $30,000 salary or wages promptly paid to Claire
    • to give Clare PAYG payment summaries for the salary or wages and for the attributed PSI at the end of the financial year.

    For the additional PAYG obligations, Claire's Computer Programming Services must:

    • work out the amount of PAYG withholding for the income attributed to Claire
    • report and pay the additional PAYG withholding amounts through the company's activity statement for the first quarter
    • give Claire an annual PAYG payment summary at the end of the financial year
    • send us an annual report showing additional PAYG withholding at the end of the financial year.
    End of example

    See also:

    70% of PSI received method

    The simplest method is to report and pay PAYG withholding on 70% of PSI (excluding GST) received by your business for the PAYG payment period.

    Example: 70% of PSI received method

    Kieran and Jackie are directors of Smith Pty Ltd, which reports GST and PAYG quarterly. Smith Pty Ltd provides Kieran's services as a computer consultant to a bank.

    For the period 1 July to 30 September, Smith Pty Ltd received income of $16,000 (excluding GST) as payment for Kieran's services – this is Kieran's PSI. Smith Pty Ltd has paid Kieran $9,000 as salary for the work he did for the bank. Smith Pty Ltd withheld PAYG of $1,222 from his salary.

    Under method one, the amount subject to PAYG withholding for the period is 70% of $16,000 = $11,200.

    PAYG withholding applied to the $9,000 promptly paid as salary. Additional PAYG withholding applies to the attributed income amount ($11,200 - $9,000 = $2,200).

    Kieran has provided a TFN declaration and has claimed the tax-free threshold. Using the tax withheld calculator (quarterly), the amount of PAYG withholding payable is $1,963. This is made up of the:

    • $1,222 of tax withheld from the salary paid to Kieran, plus
    • $741 of additional PAYG withholding applicable to Kieran's PSI.
    End of example

    Next step:

    See also:

    Percentage from previous income year method

    Under this method, you report and pay PAYG withholding on:

    net PSI percentage from previous income year

         X     

    gross PSI (excluding GST) received for the period

    The net PSI percentage equals:

    individual's gross PSI (excluding GST) for previous income year
    minus deductions that reduced gross PSI for previous income year  
    business' gross PSI (excluding GST) for previous income year

     
     
    X

     
    100
    1

    Example: Percentage from previous income year method

    Kieran and Jackie are directors of Smith Pty Ltd, which reports GST and PAYG quarterly. Smith Pty Ltd provides Kieran's services as a computer consultant to a bank.

    For the period 1 July to 30 September, Smith Pty Ltd received income of $16,000 (excluding GST) as payment for Kieran's services – this is Kieran's PSI. Smith Pty Ltd has paid Kieran $9,000 as salary for the work he did for the bank. Smith Pty Ltd withheld PAYG of $1,222 from his salary. Under this method, Smith Pty Ltd must first work out the percentage of the previous year's net PSI.

    For the previous income year Smith Pty Ltd:

    • received total payments of $100,000 (GST exclusive) for Kieran's services
    • received other income of $2,000
    • incurred deductions (other than promptly paid salary or wages and entity maintenance deductions) of $30,000 to generate the income for Kieran's services, and
    • incurred entity maintenance deductions of $5,000.

    To calculate the net personal services income percentage:

    1. Work out, for the income year, the amount of any deductions (other than entity maintenance deductions or deductions for amounts of salary or wages paid to Kieran) to which Smith Pty Ltd is entitled that are deductions relating to Kieran's personal services income.
    2. Work out, for the income year, the amount of any entity maintenance deductions to which Smith Pty Ltd is entitled.
    3. Work out any other income that Smith Pty Ltd received that was not personal services income of Kieran (or of anyone else, if applicable).
    4. Deduct the entity maintenance deductions from other income received by Smith Pty Ltd first (which is $2,000-$5,000). This leaves an amount of $3000 in entity maintenance deductions. So, total deductions that are deducted from Kieran's gross PSI are $30,000 +$3,000 = $33,000.

    The net personal services income percentage for the previous income year is:

    ([$100,000 – $33,000] / $100,000) * (100/1) = 67%

    So, the amount of Kieran's PSI subject to PAYG withholding for the period 1 July to 30 September is 67% of $16,000 = $10,720.

    PAYG withholding applied to the $9,000 promptly paid as salary. Additional PAYG withholding applies to the attributed income amount ($10,720 - $9,000 = $1,720).

    Kieran has provided a TFN declaration and has claimed the tax-free threshold. Using the tax withheld calculator (quarterly), the amount of PAYG withholding payable is $1,573. This is made up of the:

    • $1,222 of tax withheld from the salary paid to Kieran, plus
    • $351 of additional PAYG withholding applicable to Kieran's PSI.
    End of example

    Next step:

    See also:

    Legislative method

    Under the legislative method, you can work out the attributed income amount for each PAYG payment period as follows:

    • PSI (less GST) received by the business
    • less wages or salary paid to the individual within 14 days of the end of each PAYG period
    • less deductions (excluding entity maintenance deductions) you are entitled to claim in relation to the PSI.

    Before entity maintenance deductions can reduce the amount, you must first offset them against any income of the business that is not PSI.

    For the final PAYG payment period in an income year, you can further reduce this amount by the amount (if any) that entity maintenance deductions exceed other income for the year.

    Example: Legislative method

    Kieran and Jackie are directors of Smith Pty Ltd, which reports GST and PAYG quarterly. Smith Pty Ltd provides Kieran's services as a computer consultant to a bank.

    For the period 1 July to 30 September, Smith Pty Ltd received income of $16,000 (excluding GST) as payment for Kieran's services - this is Kieran's PSI. Smith Pty Ltd has paid Kieran $9,000 as salary for the work he did for the bank. Smith Pty Ltd withheld PAYG $1,222 from his salary.

     

    $

    PSI Smith Pty Ltd received

    16,000

    less

    salary or wages paid to Kieran

     

    9,000

    less

    deductions excluding entity maintenance deductions

    7,000

    4,000

    Attributed income

    3,000

    Add the PSI attributed to Kieran to the salary Smith Pty Ltd paid him ($9,000 + $3,000 = $12,000). Applying the PAYG withholding tax tables (quarterly) the amount of tax Smith Pty Ltd must withhold from $12,000 is $2,444.

    The amount withheld from Kieran's salary was $1,495.

    The attributed PSI withholding amount is: $2,444 - $1,495 = $949.

    Smith Pty Ltd must report and pay an amount of $2,444 to us in its activity statement. This amount is made up of:

    • tax withheld from the salary paid to Kieran of $1,495
    • the PAYG withholding on the attributed income of $949.

    Because Smith Pty Ltd received income other than PSI and incurred entity maintenance deductions, it will need to consider whether it has any entity maintenance deductions not applied during the year that can be deducted in the last PAYG period of the year.

    End of example

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      Last modified: 30 Mar 2017QC 17515