PAYG when receiving PSI

Overview

Under the Pay as you go (PAYG) withholding rules, you have an obligation to collect tax from payments you make 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 will need to be declared by any individual who performed the services in their individual tax return.

You will have additional PAYG withholding obligations if the PSI your business received was not promptly paid as salary or wages to each individual who performed the service. Promptly paid means paying an amount by the 14th day after the relevant PAYG payment period during which the PSI was received by your business.

If your business has a net PSI loss for an income year, there are no additional PAYG withholding obligations, as there is no income to attribute.

If you are registered for PAYG instalments, any PSI attributed may affect your instalment income.

If you are unsure of your circumstances, you can seek further advice from us or a registered tax professional.

Understanding your additional obligations

Any additional PAYG withholding obligations will depend on the circumstances of your business.

Companies and trusts

For companies and trusts there are:

• normal PAYG withholding obligations for salary or wages promptly paid to each individual who produced the PSI
• additional PAYG withholding obligations for amounts attributed to each individual who produced PSI which was not promptly paid as salary or wages.

Partnerships

For partnerships:

• there are no normal PAYG withholding obligations for amounts paid to partners, because partnerships cannot pay salary or wages to partners.
• there are additional PAYG withholding obligations for amounts attributed to a partner who produced PSI.

Your business cannot enter into a PAYG withholding voluntary agreement if there are additional obligations.

Note: These additional PAYG withholding obligations will continue until your circumstances change and the PSI rules no longer apply.

For example, if you worked out last income year that the PSI rules applied, your business would have additional PAYG withholding obligations in the current financial year unless:

• all PSI is promptly paid out as salary or wages and appropriate PAYG amounts are withheld from the payments
• you worked out that the PSI rules do not apply to that income
• you received a PSB determination from us stating the PSI rules do not apply to that income.

For a new business, or one that has not received PSI previously, the additional obligations occur when your business attributes the PSI in the current income year.

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 allow 2 simplified methods to help you.

If you intend to pay the whole of an individual's net PSI as salary and wages, these 2 methods can also be used to work out a reasonable salary amount for PAYG withholding purposes.

The 2 simplified methods of calculating attributed income for withholding purposes are:

1. 70% of the gross PSI received in the PAYG payment period
2. 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. Penalties may apply where you incorrectly calculate your PAYG withholding obligations and you end up not withholding enough tax. So it is important to take care when calculating.

If you correctly use either of the 2 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.

Method 1: 70% of gross PSI received

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.

Method 2: Percentage from previous income year

Under this method, you report and pay PAYG withholding based on the following formula:

net PSI percentage from previous income year

×

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's gross PSI (excluding GST) for previous income year

×

100 1

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.

Report and pay PAYG withholding

Once you have registered your business for PAYG withholding we will send you a BAS showing when the withholding payment is due. You need to:

• pay withheld amounts to us
• report the amounts on your BAS, and
• lodge an annual report.

You should 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

Completing your business tax return

Your business cannot claim a deduction in its income tax return for the amount of tax it paid as additional PAYG withholding. The amount of tax your business withholds under this obligation is credited to the tax return of each individual who produced the PSI.

Payment summaries

Your business is required to give a payment summary to each individual the income was attributed to by 14 July following the end of the income year. Each individual receives credits in their individual tax return for the amounts that your business withheld.

You will need to include any:

• salary or wages you promptly paid to individuals and amounts you withheld from those payments in the form PAYG payment summary – individual non business  
• income you attributed to each individual who produced the PSI and amounts you withheld from that income in the form PAYG payment summary – business and personal services income.

Salary or wages in the following income year

If your business makes payments of salary or wages between 1 and 14 July (after the end of the income year) and is affected by the PSI rules then, for the purpose of the PSI rules, the payments are treated as having been received on 30 June of the previous income year.

These payments must be included in your:

• business's BAS covering the month of July
• payment summary for the previous income year
• business's annual PAYG report for the previous year.

Payments to associates for non-principal work

Your business cannot claim a deduction for salary or wages paid to an associate employee for performing non-principal work. The salary or wages are not included in the associate's assessable income. Instead, these amounts are included in the attributed income of the individual who produced the PSI.

However, you can include amounts withheld from the associate's salary in the PSI payment summary of the individual generating the PSI as additional PAYG withholding amounts if:

• your business withheld amounts from salary or wages paid to an associate for non-principal work, and
• you have not yet issued the payment summaries for the principal worker and the associate.

The associate must not receive a payment summary for salary or wages paid for non-principal work out of the attributed PSI.

If you have already issued payment summaries to the principal worker and the associate, then either:

• your business can issue an amended payment summary in a letter to each of the principal worker and associate, with a copy for them to send to us when lodging their tax returns, or
• the associate can lodge their income tax return showing no income from your business under salary or wages, but claim a credit for the amount of tax withheld – they must include additional information with their tax return explaining their circumstances.

You may also need to:

• work out if you have to pay super
• report some payments using Single Touch Payroll – refer to Payments you must report.

Partnerships and PAYG instalments

Under the PAYG instalment system, your instalment income may be different if you receive PSI and operate as a partnership. A partnership will not be liable to pay income tax and therefore is not required to pay PAYG instalments.

If your business is a partnership, you can work out your instalment amount (as an individual partner) for each period by using the 'instalment rate' option. Your share of the instalment income is based on the partnership's instalment income for the period.

If PSI is attributed to an individual, the attributed amount is not included in the assessable instalment income of the partnership. In some circumstances, PSI may not be attributed to the individual who earned it, for example, where allowable deductions have reduced the attribution amount to nil.

Any amounts of PSI that are not attributed to an individual and remain as the partnership's income are included when working out the instalment income. If this occurs, you should consider varying your instalment rate.

Any attributed income that has additional PAYG withholding obligations is not instalment income.

Correcting mistakes

If you realise you have made a mistake or forgotten to withhold, you can request an amendment.

Where you have already lodged some of your BAS and have not been withholding the correct amounts, you need to correct this mistake by lodging a revised BAS. You cannot correct the withholding understatement on a future BAS. You need to write to us if you did not withhold any PAYG from PSI received, but you should have.

You must use the legislative method to work out the amount to withhold when revising a BAS. You cannot use the simplified methods for a PAYG payment period that has ended. However, you can use one of these methods for future PAYG payment periods.

If your business does not report and pay additional PAYG withholding amounts when required, penalties and the general interest charge (GIC) may apply. The penalty is equal to the additional amounts that should have been paid to us.

However, we have the discretion to remit the penalty amount. When deciding on remission of penalty, we consider many factors including any PAYG instalments paid. The amount of penalty remitted is considered on a case-by-case basis.

If you correctly use one of the simplified methods to calculate additional withholding, we will remit the penalty on any shortfall if, at the end of the income year, you work out that you withheld less tax than you should have as a result of using that method.

If you or your business receives personal services income (PSI), you may have additional PAYG withholding obligations.