Written byPAYG means pay as you go: the ATO system for collecting income tax during the year, withheld from wages by an employer or paid in instalments by a business.
Also known as: pay as you go, PAYG withholding, PAYG instalments, PAYG income
Key points
- PAYG withholding is the tax an employer takes out of wages before paying them, shown on payslips and reported to the ATO.
- PAYG instalments are prepayments of tax on business or investment income, usually paid quarterly through the activity statement and credited against the annual return.
- In lending, a PAYG applicant is an employee whose wages arrive with tax already taken out, assessed on payslips rather than business financials.
- Self-employed borrowers sit on the other side of that line and usually need tax returns, financials or low doc alternatives to show serviceability.
PAYG withholding
An employer registers for PAYG withholding, works out the tax on each employee's gross salary using the ATO tables, keeps that amount back and pays the net wage. The withheld tax is reported through Single Touch Payroll with every pay run and paid to the ATO monthly or quarterly depending on the size of the payroll, then finalised after 30 June so the employee's income statement appears in myGov.
Withholding also applies to some payments to businesses, most commonly where a supplier does not quote an ABN on its invoice. The paying business withholds tax from the payment at the top rate and the supplier claims it back in its return, which is why quoting an ABN matters.
PAYG instalments
A sole trader, partner, company or investor whose income is not taxed at source pays instead through PAYG instalments. Once a tax return shows enough business or investment income, the ATO enters you into the system and you pay towards the coming year's tax, usually each quarter on the activity statement, either as a set amount the ATO calculates or as a rate applied to your actual income for the quarter.
The instalments are credits, not extra tax: at year end they are offset against the tax assessed on your return and you pay the balance or receive a refund. If income drops you can vary the instalment down, within limits, which helps cashflow in a slow year.
PAYG in a finance application
Lenders sort applicants into PAYG and self-employed because the evidence differs. A PAYG borrower proves income with recent payslips, an income statement and bank statements showing the wages arriving, which is quick to verify; probation, casual hours and overtime get a closer look. For a car loan or personal loan that is often all the income paperwork required.
A self-employed applicant proves income with tax returns, notices of assessment, financial statements and activity statements, or with low doc declarations where the full set is not available. For a business loan the business's own figures matter more than the owner's PAYG history, though many owners have both.
Example
A dive instructor in Cairns is employed full time, so his employer withholds tax each fortnight and his payslips show the net pay landing in his account. When he applies for a car loan, two payslips and a bank statement cover the income check. His partner runs a boat-detailing business as a sole trader. Nobody withholds tax from her invoices, so she pays PAYG instalments each quarter on her activity statement, and when she applies for equipment finance the lender asks for her last two tax returns and notices of assessment instead of payslips.
Not to be confused with
- Goods and services tax (GST)
- GST is a tax on sales reported on the same activity statement, not a prepayment of income tax
- Australian business number (ABN)
- an ABN holder is generally self-employed, so a lender treats them as the opposite of a PAYG applicant
Frequently asked questions
What is the difference between PAYG withholding and PAYG instalments?
Withholding is tax taken out of wages by an employer before the employee is paid. Instalments are prepayments a business owner or investor makes themselves, usually quarterly, towards the tax on income nobody withholds from. Both are ways of paying income tax gradually through the year rather than in one hit after the return is lodged.
What does PAYG mean on a loan application?
It means you are an employee whose income has tax withheld by an employer. Lenders use the label to decide what income evidence to ask for: payslips and an income statement for PAYG applicants, tax returns and financials for the self-employed. A PAYG income is generally the simpler of the two to verify.
Do I have to pay PAYG instalments as a sole trader?
Once your business income produces enough tax, the ATO will write to tell you that you have entered the PAYG instalment system, and from then on you pay instalments on your activity statement. In your first year you may pay nothing until the return is lodged, then catch up in one payment, which is worth budgeting for.
Can I change my PAYG instalment amount?
Yes. If your income has fallen you can vary the instalment down when you lodge the activity statement, and if it has risen you can vary it up to avoid a large bill at year end. Varying too far below what your final tax turns out to be can attract interest, so base the change on real figures.
What documents does a PAYG borrower need for a loan?
Typically your two or three most recent payslips, the income statement from myGov for the last financial year, and bank statements showing the pay arriving. Lenders may also ask for an employment letter if you are on probation or casual. The exact list varies by lender and by the size and type of the loan.
Related terms
ATO
The ATO is the Australian Taxation Office, the national tax authority that collects income tax, GST and PAYG, administers superannuation rules, issues rulings and enforces compliance.
Read definitionBusiness activity statement (BAS)
A business activity statement (BAS) is the form a GST-registered business lodges with the ATO, usually quarterly, to report and pay GST, PAYG withholding and PAYG instalments.
Read definitionGross salary
Gross salary is the total amount an employer agrees to pay you before tax, salary sacrifice and other deductions are taken out.
Read definitionServiceability
Serviceability is a lender's test of whether you can afford the repayments on a loan from your income, after living costs, existing debts and a rate buffer.
Read definitionSole trader
A sole trader is the simplest Australian business structure: one person owns and runs the business, keeps the profits, and is personally liable for its debts.
Read definitionAustralian business number (ABN)
An Australian business number (ABN) is the unique 11-digit identifier the ATO issues to a business or other entity through the Australian Business Register.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.