PAYG withholding for Australian residential builders

What it is

Pay as you go (PAYG) withholding is the federal collection system under Part 2-5 of the Taxation Administration Act 1953. It requires a payer (the builder) to withhold tax from certain payments and remit the withheld amount to the ATO. The withheld amount is reported on the activity statement (BAS or IAS) and counts as a credit against the payee's tax liability for the year.

For a residential builder, PAYG withholding obligations apply to wages paid to employees, payments to contractors without a valid ABN, payments under voluntary agreements with contractors and payments to certain labour hire arrangements.

Withholding from employees

The builder must withhold from every wage payment to an employee using the current PAYG withholding tax tables published by the ATO. The amount depends on:

• The gross pay for the period
• The employee's TFN declaration
• Whether they are claiming the tax-free threshold
• HELP, VSL or trade support loan deductions
• Medicare levy variations

The builder must register for PAYG withholding before the first payment is made. Registration runs through the Australian Business Register or the ATO online services for business.

Reporting and remittance

PAYG withholding amounts are reported under W1 (gross wages) and W2 (PAYG withheld) on the activity statement. The activity statement cycle depends on the size of the business: monthly for medium and large withholders, quarterly for most small builders. Single Touch Payroll (STP) Phase 2 reports the pay event to the ATO at the same time the wages are paid, so the BAS figures are a summary of the STP data rather than a separate calculation.

Withholding from contractors with an ABN

The general rule is straightforward: if a contractor provides a valid ABN on their invoice, no PAYG withholding is required. The contractor accounts for their own income tax and GST through their own activity statements.

Voluntary agreements

A contractor and a payer can enter a voluntary agreement under the PAYG voluntary agreement provisions. The payer withholds at the contractor's commissioner's instalment rate (CIR) or at the flat rate of 20% if there is no CIR. Voluntary agreements are not common in residential construction but can be used where a long-term contractor wants their tax collected through the payer rather than handled in their own quarterly instalments.

Labour hire

Labour hire firms supplying workers to a builder are required to withhold PAYG on the wages paid to their on-hired workers. The builder pays the labour hire firm with no PAYG withholding (the firm provides an ABN), and the firm handles withholding on its own payroll.

Withholding from contractors without an ABN

If a supplier does not quote a valid ABN on an invoice over $75 excluding GST, the payer must withhold 47% from the payment (the top marginal rate plus Medicare levy). This is the no-ABN withholding rule under section 12-190 of Schedule 1 to the Taxation Administration Act 1953.

Validating the ABN

The ABN must be valid at the time of the invoice. The free ABN Lookup service maintained by the ABR is the source of truth. If the ABN is cancelled or does not match the entity name on the invoice, the no-ABN withholding applies even if the supplier asserts otherwise. A payer who fails to withhold remains liable for the unpaid amount and can be assessed a penalty equal to the amount that should have been withheld.

Statement by a supplier

A supplier can sometimes provide a Statement by a Supplier to declare an exemption (for example, the supplier is making a payment that is exempt income, or the supply is wholly of a private or domestic nature for the supplier). In a residential construction context the exemptions are narrow and the safer default is to insist on a valid ABN before paying any invoice over the $75 threshold.

Common compliance traps for residential builders

A few patterns trigger ATO attention in the residential sector:

Cash payments to ABN holders not on the books

Cash to a contractor with an ABN is still subject to GST and income tax in the contractor's hands. The builder must report the payment in the Taxable Payments Annual Report (TPAR) lodged by 28 August each year. TPAR catches every payment to a contractor in the building and construction industry. Cash without TPAR reporting is a red flag.

Treating an employee as a contractor

The biggest exposure is paying a worker as a contractor when the relationship is, at law, employment. The ATO reassesses PAYG withholding, super guarantee, and back-payroll tax. Refer to the separate entry on subcontractor vs employee classification for the multi-factor test.

Missing the no-ABN rule on supplier invoices

Paying a tradesperson on a handwritten invoice with no ABN and no withholding is a direct breach of section 12-190. The 47% should have been withheld. The builder, not the supplier, carries the liability.

TPAR and PAYG together

The Taxable Payments Reporting System (TPRS) and PAYG withholding work in parallel. PAYG withholding is paid through the BAS during the year. TPAR is an annual return listing every payment to building and construction contractors. Both must align with the contractor invoices on file.