You are here › Tools & Infomation › PAYG

PAYG

PAYG Voluntary Agreements - Fact Sheet

Pay As You Go (PAYG) voluntary agreements enable businesses to withhold amounts from payments they make to workers (such as contractors) to help the workers pay their income tax.

To 'withhold' means to deduct amounts from the gross payments to the worker and send the deducted amounts to the Australian Taxation Office (ATO).

What is a voluntary agreement?

It is a written agreement between a business (the payer) and a worker (the payee) to bring work payments into the PAYG withholding system. The worker must be an individual who must have an Australian Business Number (ABN), and the payments must not be subject to any other PAYG withholding.

The payer withholds amounts from payments it makes to the payee and sends the amounts withheld to the ATO. The payee is not required to pay PAYG instalments for that income.

You cannot enter into a voluntary agreement if another specific PAYG withholding category applies to the payment. Examples would be payments to a worker as an employee or under a labour hire arrangement.

What types of arrangements are suitable for a voluntary agreement?

Voluntary agreements to withhold may only be used where no other PAYG withholding applies and the payment is in whole or in part for the performance of work or services.

For example:

a computer consultant who has a contract with a manufacturing company to develop an electronic reporting system
an electrician who contracts with a building company to undertake electrical work on new units, or
a marketing consultant who contracts with a large retailing firm to undertake market research.

The diagram below outlines the circumstances where you can enter into a voluntary agreement.

What does a voluntary agreement include?

A voluntary agreement must be a written agreement between the payee and payer that includes:

the commencement date of the agreement
what the payments are for (for example, plumbing services)
a statement that the payments made under the arrangement are subject to a voluntary agreement under section 12-55 of Schedule 1, Part 2-5 of the Taxation Administration Act 1953
the payee's ABN, name and address
the payer's ABN, name and address
the rate of withholding, and
the signatures of both the payer and payee.

A PAYG voluntary agreement form is available from the ATO's web site at www.taxreform.ato.gov.au It is not compulsory to use this form, but the written agreement must include all the information specified above.

How much must the payer withhold from payments?

The rate of withholding is either the payee's instalment rate as notified by the ATO or a flat rate of 20 per cent. The payer then withholds at the appropriate rate from the gross amount payable after deducting any goods and services tax (GST) charged.

The payee's instalment rate is a percentage figure normally used to calculate PAYG instalments. The ATO will generally notify payees of their instalment rates during July 2000. For the purpose of voluntary agreements, the instalment rate used must be the rate notified by the ATO - this is called the Commissioner's instalment rate (CIR).

The payee must disclose their CIR or state that they do not have one.

If the payee has a CIR greater than 20 per cent, the payer must withhold at the CIR.

If the payee has a CIR of 20 per cent or less, the payer must withhold at the flat rate of 20 per cent unless the payee and payer agree to use the CIR.

If the payee's CIR is not known at the time of the agreement, the flat rate of 20 per cent applies.

How long does an agreement last?

A voluntary agreement can cover a specific task or apply to successive arrangements between the payer and payee.

When the payee is first advised of their CIR, or advised of a new CIR, they may need to enter into a new agreement after considering the rules applying to the rate of withholding (as discussed above).

Either party can end a voluntary agreement at any time by notifying the other in writing.

How long do I keep records?

A copy of the form must be retained by both the payer and the payee while it is in force and for five years after the last payment is made under the agreement. It is not necessary to send a copy to the ATO.

What do payers need to do?

Payers need to:

complete and lodge their activity statements with the ATO, including any amounts withheld under voluntary agreements
give each payee a voluntary agreement payment summary by 14 July after the financial year (or earlier if requested), and
complete an annual report of all payments made under voluntary agreements and send this to the ATO by 14 August each year.

Do payees still need to send in activity statements?

Yes. Payees need to lodge their activity statements to report on their business tax obligations and entitlements, including PAYG instalments and GST. If you have nothing to report for a particular reporting period, you must still sign and date your activity statement and return it to the ATO by the due date.

When completing your activity statement, remember that your instalment income does not include income you received under a voluntary agreement. This is because such income has already been subject to PAYG withholding through the voluntary agreement.

Also, a voluntary agreement does not change your obligation to lodge an income tax return that reports all the income you earn, including income covered by voluntary agreements.

Do payees charge GST?

If a payee is not registered for GST they cannot include GST in the price of the goods or services they supply, nor are they entitled to input tax credits.

If a payee is registered for GST, they only charge GST under the voluntary agreement if the payer is not entitled to a full GST input tax credit for the goods or services being supplied. The payer must indicate, on the voluntary agreement form, whether or not they are entitled to a full input tax credit.

If the payer would normally be entitled to a full GST input tax credit, the payee cannot charge GST on the goods or services they supply under the voluntary agreement.

If the payer is not entitled to a full GST input tax credit, the payee (if registered for GST) must charge GST on any taxable supplies they make under the voluntary agreement (taxable supplies are goods and services that are subject to GST).

Either way, a GST-registered payee can claim input tax credits for any GST paid on goods or services bought and used in performing the work under the voluntary agreement.

Examples

Jeannie runs a small computer programming enterprise. She contracts with Big Ships Inc., a ship-building company, to help develop design software. Jeannie and Big Ships make a voluntary agreement so that Big Ships deducts tax from the payments to Jeannie.

Jeannie is registered for GST. She cannot include GST in the price she charges for the programming services for Big Ships. However, she can claim input tax credits for any GST paid on goods or services bought or used in performing the work.

Jeannie's friend Jim runs a similar enterprise and contracts with Big Bank Inc. to help develop a program for internet banking. Jim and Big Bank make a voluntary agreement so that Big Bank deducts tax from the payments to Jim.

As Big Bank makes financial supplies it is not entitled to claim input tax credits for the things it buys, including Jim's services that relate to the supply of financial services. Jim is registered for GST and must include GST in the price he charges Big Bank. Jim can claim input tax credits for any GST paid on goods or services bought or used in performing the work.

Need more information?

Other tax reform information is available through the following contacts:

phone the business Tax Reform Infoline on 13 24 78
download information from the web site at www.taxreform.ato.gov.au
obtain A Fax From Tax on 13 28 60
write to PO Box 9935 in your capital city.

People with a hearing or speech impairment can phone the National Relay Service on 1300 130 478.

People who do not speak English and need help from the ATO can phone the Translating and Interpreting Service (TIS) on 13 14 50.

About this fact sheet

Please get help from the ATO or a professional tax practitioner if you feel this fact sheet does not fully cover your circumstances. We regularly revise our publications to take account of changes to the law and you should make sure that this edition is the latest.

As part of our commitment to producing accurate publications, a taxpayer will not be subject to penalties if it is demonstrated that a tax claim is based on wrong information contained in this fact sheet. However, interest could be payable depending on the circumstances of the case.

The information in this fact sheet is current as at 6 July 2000.

We would like to acknowledge the source of our information. The above information has been extracted from an document published on the Australian Taxation Office Website www.ato.gov.au with regards to the new tax system – Tax Reform.