Understanding Australian Payroll Legislation – Part I

PAYG: Legislative Details

Pay As You Go (PAYG) is the system of deducting income tax installments from employees' personal earnings, and remitting the money to the Australian Tax Office (ATO).

The amount of tax payable is determined by the information provided on the Employment Declaration form, and whether or not the employee is entitled to be paid Leave Loading.

In various instances, the tax for some earning types may be calculated separately as per the ATO recommendation. These include:

• Bonuses
• Commissions
• Backpay
• Advance pay

Tax scales for PAYG

The following table defines the seven tax scales in ATO's statement of formulas:

• 1 - where tax-free threshold not claimed in TFN Declaration
• 2 - where payee is eligible to receive leave loading and has claimed tax-free threshold
• 3 - foreign residents
• 4 - where tax file number not provided by payee
• 5 - where payee claimed full exemption from Medicare levy in Medicare levy variation Declaration
• 6 - where payee claimed half exemption from Medicare levy in Medicare levy variation Declaration
• 7 - where payee not eligible to receive leave loading and has claimed tax-free threshold

Tax calendar for PAYG

The tax year starts on 1 July one year and ends on 30 June the following year. Each tax

year may be referred to as a combination of the two partial calendar years, for example

16/17.