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Re: PAYG withholding and bonus

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Hi
Is there a PAYG withholding obligation on the Bonus payments (not ordinary earning) made to an employee?

This employee is a spouse of the shareholder. So, any Bonus payments will be used as repayments against shareholder's Div 7 A Loan balance.

My question is whether

Net Bonus payments (e.g, Gross Bonus - PAYGW) are required to be offset against the Div 7A Loan (similar sense to net dividend)
(or)
Gross Bonus Payment can be used as repayments against Div 7A Loans.

I would be greatly appreciated if someone can share your knowledge in this regards.

Regards,

Pinky
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Hi @PinkyT,

 

Thanks for your question!

 

The PAYG withholding obligation exists for all employees, regardless of their relationship to associates of the business. You should be using Schedule 5 to calculate withholding on the amount of the bonus.

Bonuses are required to be reported on the income statement at the end of the financial year, so regardless of whether or not the bonus amount is going towards a Division 7A loan, you must still withhold tax from that payment.

 

If you don't, then you may be causing the employee to incur a tax debt when they lodge their individual tax return.

 

Hope this helps,

 

Rachael B.

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Hi @PinkyT,

 

Thanks for your question!

 

The PAYG withholding obligation exists for all employees, regardless of their relationship to associates of the business. You should be using Schedule 5 to calculate withholding on the amount of the bonus.

Bonuses are required to be reported on the income statement at the end of the financial year, so regardless of whether or not the bonus amount is going towards a Division 7A loan, you must still withhold tax from that payment.

 

If you don't, then you may be causing the employee to incur a tax debt when they lodge their individual tax return.

 

Hope this helps,

 

Rachael B.

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Hi Rachel,

 

Thanks for the answer. 

 

In this scenerio below, net bonus $25,000 needs to go against Div 7A loan account. Is the below journal correct for tax purpose?

E.g.,

Gross Bonus : $30,000 (Wages/Bonus Expense Dr)

PAYGW : $5,000 (PAYGW payable Cr)

Net Wages : $25,000 (Div 7A Loan Cr)

 

Regards,

 

PinkyT

 

 

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Hi again @PinkyT,

 

Thanks for getting back to me!

 

Bonuses are a little bit trickier to calculate than regular payments of salary or wages, and we usually need a lot more information in order to work out the correct amount of tax to withhold.

 

Here's a rough example using some of the figures that you've provided and the steps outlined in the Method A instructions:

 

  1. Work out your employee's gross earnings. Let's say this is $2,000 for the fortnight.
  2. Use the relevant  tax table to find the amount to be withheld from Step 1. = $366
  3. Add any additional payments to be made in the current pay period together and divide the total by the number of pay periods in the financial year. ($30,000 + $2,000 / 26). Ignore any cents. = $1,230
  4. Add the amount at Step 3 ($1,230) to the gross earnings at Step 1 ($2,000) = $3,230
  5. Use the relevant tax table to find the amount to be withheld from the amount at Step 4 = $792
  6. Subtract the amount at step 2 ($366) from the amount at step 5 ($792) = $426
  7. Multiply the amount at Step 6 ($426) by the number of pay periods used in Step 3 (26) = $11,076
  8. Multiply the additional payment being made in the current pay period ($30,000) by 47% = $14,100
  9. Use the lesser amount of Step 7 and Step 8 for the withholding on the additional payment = $11,076. Ignore any cents.
  10. Work out the total PAYG Withholding for the current pay period by adding the withholding on the additional payment (Step 9 = $11,076) to the withholding on the gross earnings (Step 2 = $366) = $11,442

You'd need to adjust the calculation to include the actual figures, but it's quite likely that the PAYGW amount of $5,000 will not be sufficient on a bonus of that size. You may also wish to look at using Method B(ii) as this may give you a different result again.

 

Whatever the payee does with the net sum is up to them, but they will be liable for paying tax on the gross amount when they lodge their tax return.

 

I hope this helps,

 

Rachael B.