PAYG stands for Pay As You Go. PAYG withholding is the system by which employers in Australia deduct income tax from their employees wages before paying them, and then remit those amounts to the ATO on the employee's behalf. It is essentially a prepayment of your annual tax liability, collected gradually throughout the year rather than in one lump sum at tax time.
How it works for working holiday makers
When you provide your TFN and a Tax File Number Declaration form to your employer, your employer uses that information to determine what rate to apply to your wages. For working holiday visa holders, the correct rate is 15% on income up to $45,000 per year. Your employer deducts this amount from each pay, keeps a record of it, and periodically remits it to the ATO.
If you do not provide your TFN and declaration form, your employer must withhold at the highest rate of 47%. The excess is then reconciled at the end of the year through your tax return.
What appears on your payslip
Your payslip should show your gross earnings for the pay period, the amount of tax withheld, and your net pay which is the amount that actually reaches your bank account. Check your payslip carefully to make sure the withholding rate looks correct. If 47% is being taken out when you have provided your TFN, raise it with your employer immediately.
How it connects to your tax return
At the end of the financial year, your employer finalises their payroll reporting and reports the total wages paid to you and the total tax withheld to the ATO. This appears as your income statement in your myGov account. When you lodge your tax return, the ATO compares your actual tax liability for the year against the total withheld through PAYG. Any difference is either refunded to you or collected from you depending on whether too much or too little was withheld.
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