What is the Difference Between PAYG Instalments Tax and PAYG Withholding Tax?

by | Jan 28, 2018

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As a business owner you are probably paying several different types of tax such as GST and company tax. Two other commonly paid taxes for small businesses are Pay As You Go (PAYG) Instalment tax and Pay As You Go (PAYG) Withholding tax.

Because the names are so similar you may think they are the same tax. Unfortunately this is not the case, and business owners like you often get them mixed up. To solve this problem, here is some information on PAYG Instalment tax and PAYG Withholding tax that may help you remember which is which.

Pay As You Go (PAYG) Instalment Tax

Under the PAYG Instalment system, you make payments to the ATO throughout the year towards the estimated full-year tax liabilities of you and your company. This saves you from having to pay your entire year’s tax obligations at the end of the financial year.

When you lodge your individual and company tax returns at the end of the year, the ATO will determine whether you have paid the right amount of tax through instalments during the year. If you have not paid enough tax, you will pay the shortfall. If you have paid too much tax, the ATO will send you a refund.

For a more detailed explanation of Pay As You Go (PAYG) Instalment Tax please read this article.

Pay As You Go (PAYG) Withholding Tax

Under the PAYG Withholding system, you make payments to the ATO throughout the year towards the estimated full-year tax liabilities of your employees and suppliers.

Although these payments are made towards the tax liabilities of others, it is your responsibility to lodge PAYG Withholding reports with the ATO and make payments during the year. This saves your employees and suppliers from having to pay their entire year’s tax obligations at the end of the financial year.

When your employees and suppliers lodge their tax returns at the end of the year, the ATO will determine whether they have paid the right amount of tax through instalments during the year. If they have not paid enough tax, they will pay the shortfall. If they have paid too much tax, the ATO will send them a refund.

For a more detailed explanation of Pay As You Go (PAYG) Withholding Tax please read this article

How To Remember The Difference

The easiest way to remember the difference between the two systems is:

  • PAYG Instalment tax applies to you
  • PAYG Withholding tax applies to others

If you can remember that, you will go a long way towards not getting these two similarly named tax systems mixed up.

Mark Cunningham

Mark Cunningham

Xero Specialist | Udemy Instructor | Small Business Owner

I have been a company accountant for more than 20 years. I am now dedicated to empowering small business owners through my highly-rated and popular Udemy courses on Xero, bookkeeping and accounting.

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