If you or your business receives personal services income (PSI), you may have to meet certain PAYG withholding obligations. Under the Pay As You Go (PAYG) withholding rules, you need to collect tax from payments made to employees and some businesses so they can meet their end-of-year tax liabilities.
If your business receives PSI and the PSI rules apply, that income must be declared by any individual who performed the services on their individual tax return. You may have to meet additional PAYG withholding obligations if the PSI was not paid as wages or salary to each individual who performed the service. Promptly paid means paying an amount by the 14th day after the PAYG payment time period during which the PSI was received by your business. If your business records a net PSI loss for the income year, no additional PAYG withholding applies, as there is no income to attribute. However, if you are registered for PAYG instalments, any attributed PSI may still impact your instalment income.
Understanding Your Additional Obligations
Any additional PAYG withholding obligations may vary depending on the circumstances of your business.
Companies and trusts
For companies and trusts, there are:
- Normal PAYG withholding obligations for wages or salary promptly paid to each individual who generated the PSI.
- Additional PAYG withholding obligations arise for amounts attributed to each individual who generated PSI that was not paid promptly as salary or wages.
For more detailed information, you can speak to a tax accountant Melbourne.
Partnerships
For partnerships:
- No normal PAYG withholding obligations apply to amounts paid to partners, because partnerships cannot pay wages or salary to partners.
- There are additional PAYG withholding obligations for amounts attributed to a partners who generated PSI.
If there are additional obligations, your business cannot enter into a PAYG withholding voluntary agreement.
Work Out Any Additional PAYG Withholding Amounts
Your business must check for any additional PAYG withholding amounts for each business activity statement (BAS) for the attributed income only. Sometimes, it might be difficult for businesses to check for the attributed income amount each time their BAS is due, so 2 simplified methods are provided to help you. If you are likely to pay the whole of an individual’s net PSI as wages and salary, these two methods can be used to check for a reasonable salary amount for PAYG withholding purposes. Here are the two simplified methods of calculating attributed income for withholding purposes:
- 70% of the gross PSI received in the PAYG payment time period
- a percentage of the net PSI from the previous income year
If you are looking to calculate the exact amount of PSI and additional PAYG withholding for the BAS period, you can use a legislative method. The legislative method helps you match your PAYG withholding more closely to your actual PSI income and expenses. However, if you make a mistake and do not withhold enough tax, penalties may apply. So it is important to calculate the amounts carefully.
If you use either of the two simplified methods correctly, you will not be penalised even if, at the end of the income year, you find that you withheld less tax than required. It might be difficult for you to understand different methods for calculating the exact PSI amount. Therefore, it would be beneficial to speak to a professional for guidance. Whether you are looking at any tax obligations or want to lodge tax returns, you can speak to tax agents Melbourne.
Report and Pay PAYG Withholding
After registering your business for PAYG withholding, you will receive a BAS showing when the withholding payment is due. You have to:
- Pay withheld amounts to the ATO
- Report the amounts on your BAS
- Lodge an annual report.
You must be aware of the following:
- Completing your business tax return
- Payment summaries
- Salary or wages in the following income year
- Payments to associates for non-principal work
Conclusion
PSI can affect your PAYG withholding obligations, and the rules vary depending on your business structure and how income is paid. Using the correct method to calculate and report PAYG withholding is important to stay compliant and avoid penalties. Getting advice from Reliable Melbourne Accountants can help ensure everything is handled correctly.