The legislative method is the most complex method for working out additional PAYG withholding on PSI.
Under the legislative method, you can work out the attributed income amount for each PAYG payment period as follows:
- PSI (less GST) received by the business
- less wages or salary paid to the individual within 14 days of the end of each PAYG period
- less deductions (excluding entity maintenance deductions) you’re entitled to claim in relation to the PSI.
Before entity maintenance deductions can reduce the amount, you must first offset them against any income of the business that is not PSI.
For the final PAYG payment period in an income year, you can further reduce this amount by the amount (if any) that entity maintenance deductions exceed other income for the year.
Example
Kieran and Jackie are directors of Smith Pty Ltd, which reports GST and PAYG quarterly. Smith Pty Ltd provides Kieran's services as a computer consultant to a bank.
For the period 1 July to 30 September, Smith Pty Ltd received income of $16,000 (excluding GST) as payment for Kieran's services – this is Kieran's PSI. Smith Pty Ltd has paid Kieran $9,000 as salary for the work he did for the bank. Smith Pty Ltd withheld PAYG $1,222 from his salary.
| PSI Smith Pty Ltd received 16,000 | 16,000 |
|
less salary or wages paid to Kieran |
9,000 |
|
less deductions excluding entity maintenance deductions |
7,000 4,000 |
| Attributed income | 3,000 |
Add the PSI attributed to Kieran to the salary Smith Pty Ltd paid him ($9,000 + $3,000 = $12,000). Applying the PAYG withholding tax tables (quarterly), the amount of tax Smith Pty Ltd must withhold from $12,000 is $2,444.
The amount withheld from Kieran's salary was $1,495.
The attributed PSI withholding amount is: $2,444 − $1,495 = $949.
Smith Pty Ltd must report and pay an amount of $2,444 to the ATO in its BAS. This amount is made up of:
- tax withheld from the salary paid to Kieran of $1,495
- the PAYG withholding on the attributed income of $949.
Penalties may apply if Smith Pty Ltd incorrectly calculates the PAYG withholding obligations and ends up not withholding enough tax. So it’s important to take care when calculating.
Smith Pty Ltd will continue to use the legislative method to work out the PAYG withholding on Kieran’s PSI in each quarterly BAS throughout the income year.
Because Smith Pty Ltd received income other than PSI and incurred entity maintenance deductions, it will need to consider whether it has any entity maintenance deductions not applied during the year that can be deducted in the last PAYG period of the year.
Smith Pty Ltd will send the ATO an annual report showing the total PAYG withholding at the end of the income year.
