What Is Withholding Tax in Australia? A Complete Guide for 2025

When Do You Need to Withhold Tax?

Knowing when you need to withhold tax is the first step in meeting your obligations. The law sets out clear provisions for when withholding applies.

You’ll need to withhold tax if you make payments to:

• Employees (including wages, salaries, commissions, and bonuses)

• Company directors (for directors’ fees)

• Businesses that do not provide their Australian Business Number (ABN)

• Contractors who have a voluntary agreement with you for PAYG withholding

• Non residents who receive certain types of income in Australia

It’s also important to check the tax status of each recipient. For example, if you operate as a sole trader or in a partnership, you don’t need to withhold tax from drawings you take for personal use. These are considered business profits, not wages, and are taxed through your personal tax return.

Each type of payment may have different withholding rates. The ATO provides resources to help you work out how much tax to withhold for each situation, including a following table of rates and an online calculator.

PAYG Withholding for Employers

For many businesses, PAYG withholding for employees is the most common obligation. When you hire someone, you’ll need to collect their Tax File Number (TFN) using the appropriate form. This form also lets you know if they want to claim the tax free threshold, which can affect how much tax you need to withhold.

The amount of tax withheld from an employee’s wages depends on several factors:

• Their total income

• Whether they claim the tax free threshold

• Any tax offsets they’re entitled to

• Whether they have a HELP or VSL debt

• Their Medicare levy status

You’ll also need to consider if any deductions or exemptions apply. The ATO’s tax tables and calculators can help you determine the correct withholding amounts for each pay period. Using Single Touch Payroll (STP) software can make this process easier, as it calculates and reports tax withheld directly to the ATO.

If an employee does not provide a tax file number, you must withhold tax at the highest rate. This ensures the Australian government collects the correct amount of tax, even if the employee’s details are incomplete. To avoid costly penalties and compliance issues with PAYG withholding, read our article on the PAYG Withholding Compliance Guide. 

No ABN Withholding Rules

If you make payments to a business or supplier and they do not provide their Australian Business Number (ABN), you are required to withhold tax from the payment at the top marginal rate, which is currently 47%. This rule applies to payments over $75 (excluding GST).

The withheld amount is sent to the ATO and credited to the recipient when they lodge their tax return. This encourages businesses to quote their ABN and ensures the government collects the correct tax.

Some payments are exempt from this rule, such as:

• Private or domestic payments (not business-related)

• Payments of $75 or less (excluding GST)

• Payments to suppliers not carrying on an enterprise in Australia

• Payments where the entire amount is exempt income for the supplier

If you’re unsure whether an exemption applies, you can ask the supplier to complete a form called “Statement by a supplier,” which explains why they are not required to quote an ABN.

Non-Resident Withholding Tax

Special rules apply when making payments to non residents. Withholding tax ensures that Australia collects tax on income earned within its borders, even if the recipient is not an Australian resident.

Common payments subject to non-resident withholding tax include:

• Interest earned

• Unfranked dividends paid by Australian companies

• Royalties

• Managed Investment Trust (MIT) distributions

Withholding rates for non residents depend on the type of payment and whether Australia has international tax treaties with the recipient’s country. For example:

• Interest: Usually 10% if there’s a treaty, otherwise higher

• Unfranked dividends: Often 30% unless reduced by a treaty

• Royalties: Typically 30% unless a treaty applies

If you pay interest to offshore banking units or make offshore borrowings, special rules may apply. Always check current provisions and rates with the ATO to make sure you’re withholding the correct amount.

Voluntary Agreements and Special Cases

Some payment arrangements don’t fit the standard employee or supplier model. In these cases, there are special rules to help you manage withholding tax.

Voluntary Agreements

If you work with independent contractors, you usually don’t need to withhold tax. However, you and the contractor can enter into a voluntary agreement for PAYG withholding. This means you’ll withhold a set amount from each payment and remit it to the ATO on their behalf.

The withholding rate is either the contractor’s Commissioner’s Instalment Rate (CIR) or a flat rate of 20% if the CIR is not known or is less than 20%. Both parties must sign a written agreement for this arrangement. Either party can end the agreement at any time with written notice.

Other Payments and Special Provisions

There are also rules for other payments, such as lump sum payments, eligible termination payments, and certain taxable investments. It’s important to check whether withholding is required for each type of payment and to apply the correct withholding rates.

Reporting and Paying Withheld Amounts

Once you’ve withheld tax, you need to report and pay these amounts to the ATO. This is usually done through your business activity statement or via Single Touch Payroll for employee payments.

Single Touch Payroll (STP) Reporting

STP makes it easier to report wages, PAYG withholding, and superannuation to the ATO each payday. Employees can then access their income and tax withheld information through their myGov account.

Payment Schedules

How often you need to pay withheld amounts depends on your business size:

• Small withholders: Quarterly

• Medium withholders: Monthly

• Large withholders: More frequently, sometimes weekly or daily

Meeting these deadlines is important to avoid penalties or interest charges. Good record keeping and reminders can help you stay on track.

Penalties and Compliance

The ATO takes compliance seriously. If you don’t withhold when required, withhold the wrong amount, or don’t report and pay on time, you could face penalties, interest, and even director penalties.

Since July 2019, you can only claim deductions for payments to workers if you’ve met your PAYG withholding and reporting obligations. This means failing to withhold can result in losing your deduction for the entire payment.

Keep records of all withholding activities for at least five years. This includes payment details, calculations, forms, and any statements received from payees.

Conclusion

Understanding withholding tax is essential for Australian businesses. By knowing when you need to withhold, how much tax to withhold, and how to report and pay these amounts, you can avoid penalties and keep your business running smoothly.

Tax rules and provisions can change, so it’s important to stay informed and review your processes regularly. If you’re unsure about your obligations or how they apply to your business, consider reaching out for professional advice.