Understanding Australian income tax for employers
Reviewed by Mellow Editorial Team, HR & payroll content team
Employers in Australia are responsible for calculating, withholding and remitting income tax on behalf of their employees through the Pay As You Go (PAYG) withholding system — it is not optional, and getting it wrong creates liability for the business.
How PAYG withholding works
When you pay an employee, you withhold a portion of their gross pay and send it to the Australian Taxation Office (ATO) on their behalf. The amount withheld is based on the employee's Tax File Number (TFN) declaration and any withholding variation they submit.
Income tax in Australia is progressive, meaning the rate increases as earnings rise. You use the ATO's tax tables — updated each financial year — to determine the correct withholding amount for each employee based on their pay frequency (weekly, fortnightly, monthly) and any tax offsets they claim, such as the low income tax offset.
If an employee does not provide a TFN, you are required to withhold tax at the top marginal rate. This protects the revenue base and gives employees a strong incentive to provide their details promptly.
The Medicare levy
On top of income tax, most employees are liable for the Medicare levy, which sits at 2% of taxable income. In practice, this is built into the ATO's withholding tables, so you do not calculate it separately — it is already reflected in the amount you withhold when you apply the correct tax table. Some employees may be exempt or liable for a reduced levy depending on their circumstances; they declare this on their TFN declaration.
HECS/HELP repayments
Employees who carry a HECS or HELP study debt have additional withholding applied through payroll. Repayments are calculated on a banded scale tied to the employee's income — the higher the income, the higher the repayment percentage. When an employee indicates they have a study or training support loan on their TFN declaration, you apply the relevant ATO repayment table on top of the standard tax withholding. This extra withholding is remitted to the ATO along with the regular PAYG withholding and credited against the employee's debt when they lodge their tax return.
Reporting through Single Touch Payroll
Every time you run a pay event — whether weekly, fortnightly or monthly — you must report payroll information to the ATO in real time through Single Touch Payroll (STP). This means the ATO receives each employee's gross pay, tax withheld and superannuation information at the same time your employees are paid.
STP reporting is not a separate task you do at the end of the year. It happens automatically through your payroll software at each pay run. What you must do separately is finalise your STP data for the financial year by 14 July. Finalisation confirms to the ATO (and your employees) that the year's figures are correct, which allows employees to lodge their personal tax returns without waiting for a paper payment summary.
If you miss the 14 July finalisation deadline, employees may be delayed in lodging their returns, and the ATO may follow up. Extensions are available in limited circumstances, but you need to request them.
Remitting withheld tax to the ATO
Withholding tax collected from employees does not belong to your business. You hold it on trust and must remit it to the ATO on a schedule determined by the size of your PAYG withholding obligation — small withholder, medium withholder or large withholder. The ATO sets these thresholds and notifies you of your category. Missing a remittance or remitting late can result in penalties and interest charges, so matching your payment schedule to your category matters.
Practical steps to stay compliant
A few habits keep PAYG withholding straightforward in practice:
- Collect a completed TFN declaration from every new employee before their first pay run.
- Use ATO-approved payroll software that applies current tax tables and files STP automatically.
- Reconcile your PAYG withholding account regularly — what you have withheld should match what you have remitted.
- Update your tax tables at the start of each financial year; the ATO releases updated schedules before 1 July.
- Finalise STP by 14 July without exception.
For businesses employing people in multiple countries, the Australian obligations layer on top of — not instead of — local requirements elsewhere, which is one reason many businesses centralise payroll through a single platform. How Mellow runs payroll across six countries covers that in more detail.
The core principle across all of it is that PAYG withholding is a collection mechanism you operate on the ATO's behalf. Accuracy at each pay event, combined with timely reporting and remittance, keeps you on the right side of your obligations.
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