In Australia, “tax withheld” means the income tax deducted from employee’s wages or payments. It remits directly to the Australian Taxation Office (ATO) on the employee’s behalf. Originally Published on https://taxly.ai/tax-advice/what-does-tax-withheld-mean-in-australia/

1. What Does Tax Withheld
Mean in Australia?
In Australia, “tax withheld” means the
income tax deducted from employee’s
wages or payments. It remits directly to the
Australian Taxation Office (ATO) on the
employee’s behalf.
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2. Tax is Withheld from Employee Payroll
When an employer pays an employee, they are required to withhold
a portion of the employee’s gross wages as income tax before
issuing the net pay. This withheld amount is then sent to the ATO.
Year-Round Income Tax Collection
The purpose of tax withholding is to prevent individuals from facing
a substantial tax bill at the end of the financial year. By spreading
the tax payment over each paycheck, it helps taxpayers budget and
ensures the government receives its revenue regularly.
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3. Tax Regulatory Compliance
Employers play a crucial role in ensuring tax compliance. They must
accurately calculate and withhold the correct amount of tax based on
the employee’s income, tax brackets, and any tax offsets or deductions
they are entitled to.
Tax Withheld Reporting
Employers provide employees with payment summaries that detail the
total income earned and the amount of tax withheld throughout the year.
Employees use this information to complete their tax returns.
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4. Tax Withheld Applies to Following Payment Types
● Employee Salaries
● Worker wages
● Director fees
● Payments to contractors who don’t quote their
Australian Business Number (ABN).
How to Calculate Tax Withheld
The ATO provides online calculators to help employers and
individuals determine the correct amount of tax to withhold. These
tools take into account individual circumstances, such as
deductions and tax offsets.
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5. Tax Withheld and PAYG
Employers have specific obligations related to tax withholding, including
registering for PAYG (Pay As You Go) withholding, paying withheld
amounts to the ATO, reporting withheld amounts on activity
statements, providing payment summaries to employees, and lodging
an annual PAYG withholding report.
PAYG Record Keeping
Employers are required to maintain records related to PAYG withholding
transactions for at least five years to ensure compliance with tax
regulations.
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6. You Must Withhold Tax To
● Ensure Regular Tax Payments
● Promote Tax Compliance
● Support Government Revenue
● Simplify Tax Filing
● Ensure Equity
● Align with Tax Law Changes
● Reduce Financial Burden
● Facilitate Government Budgeting
● Minimize Collection Costs
● Prevent Tax Refund Delays
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7. 3 Types of Tax Withholders in Australia
1. Small Withholders
● Withholds $25,000 or less in income tax each year.
● Pays withholding amounts to the Australian Taxation Office
(ATO) every quarter.
2. Medium Withholders
● Withholds income tax ranging from $25,001 to $1 million
annually.
● Pays withholding amounts to the ATO every month.
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8. 3. Large Withholders
● An individual or business that withheld amounts totaling
more than $1 million in income tax in a previous financial
year or is part of a company group that has withheld more
than $1 million in a previous financial year.
● Amounts withheld are paid and sent electronically to the
ATO twice a week.
● Payment due dates depend on the day withholding took
place.
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9. When is Tax Withheld Applicable?
1. Employee Wages:
Employers withhold tax from the wages of their employees.
This includes salaries, hourly wages, bonuses, and commissions.
2. Independent Contractors:
Businesses withhold tax from payments made to independent
contractors who don’t provide an Australian Business Number
(ABN).
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10. 3. Directors’ Fees:
Directors’ fees paid to company directors are subject to tax
withholding.
4. Voluntary Agreements:
Payments made under voluntary agreements, such as those to
subcontractors, may be subject to withholding tax.
5. Payments to Businesses without ABNs:
Payments made to businesses or contractors that fail to provide an
ABN may be subject to withholding tax.
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11. 6. Nonresident Aliens:
Nonresident aliens who earn income from Australian sources, such as
interest, dividends, or wages, may have tax withheld.
7. Interest and Dividends:
Individuals and entities may have tax withheld from interest and
dividend payments from Australian sources.
8. Special Payments:
Some payments, such as those made to seasonal workers, nannies, and
cleaners, may have specific tax withholding rules.
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12. What Happens When Employees Retire or Leave?
1. Final PAYG Withholding Payments:
Employers must make final PAYG withholding payments on behalf of
departing employees.
This includes withholding tax from any final payments made to the employee,
such as salary, accrued leave, or termination payments.
2. PAYG Payment Summary – Employment
Termination Payment (ETP):
Employers are required to complete a PAYG Payment Summary – Employment
Termination Payment (ETP) for departing employees.
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13. 3. Send PAYG Summaries to Employees:
Employers must send the PAYG Payment Summary – ETP to the
departing employee by the specified deadline.
This summary outlines how much the employee was paid during
the financial year and how much tax was withheld.
4. TFN Declaration:
Employers must retain the departing employee’s Tax File Number
(TFN) declaration until the end of the next financial year.
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14. 5. Check Final Details:
Employers include the details of any final payments made to the
departing employee in the PAYG Payment Summary Statement.
6. Superannuation and FBT Obligations:
Employers may have superannuation and fringe benefit tax (FBT)
obligations when employees leave.
These obligations should be addressed in compliance with relevant
regulations.
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15. When Are You No Longer Required to Withhold Tax?
● Ceasing to Have Employees:
If your business no longer has employees, you can cancel your
registration for PAYG withholding.
● Meeting All Tax Obligations:
Before canceling your PAYG withholding registration, you must
ensure that you have met all your PAYG withholding obligations.
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16. Is Tax Withheld Deductible?
Tax withheld represents the money that your employer or payer
deducts from your income and sends directly to the Australian
Taxation Office (ATO) on your behalf. It’s essentially a prepayment
of your income tax based on your earnings.
To make the most of available deductions and offsets, maintain
accurate records of your income, expenses, and deductions.
Automate your potential tax deductions using an AI powered tax
deductions app.
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17. The Bottomline
Tax withheld is an important part of the Australian taxation
system which saves employers from huge tax burdens at the end
of the financial year. It not only keeps the money circulating in
the tax system and Australian economy but also offers significant
financial record keeping relief to employers.
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