Living as an adult in Australia will give you ideas and knowledge in everything taxes and deductions.
However, it’s challenging to understand contexts like “tax at source” or “tax deducted at source.”
But what is this tax at source? Let’s read the blog post to gain a deeper understanding of it and its entails.
What is tax deducted at source?
Tax deducted at source (withholding tax) is a system in which a payer deducts tax from the recipient’s income at the applicable rate and remits it to the tax authorities on their behalf.
The whole point of it is to ensures that the recipient’s tax obligations are met before they get their money.
The government collects taxes in a timely manner, and it targets individuals who receive salaries, wages, and other types of income.
TDS relieves employees from the hassle of paying a potentially large tax bill in a single lump sum at the end of the year.
Who pays tax at source?
As far as tax at source is concerned, if you are living in Australia, individuals and businesses must pay their due diligence.
All employees are to pay their taxes at source via the PAYG system, whereby employers withhold taxes directly from their wages/salary and do the needful to the ATO.
Some businesses may require withholding tax from payments that are directly made to contractors, especially non-residents or those who do not provide their TFN.
Self-employed individuals or contractors are in charge of managing their tax deductions through PAYG.
Examples of tax deducted at source
Here are some simple examples of tax deducts at source as follows;
1. Salary
An employer is supposed to calculate the amount of tax that needs to be deducted based on the applicable rate and send it directly to the ATO.
The remaining amount will be given to an employee as their net salary, which is money after tax deductions.
2. Interest on bank accounts
Interest earned on savings accounts and investments is generally taxable income. Depending on the applicable tax laws and your circumstances, the bank or financial institution may withhold taxes on this interest income at source before paying it to you.
3. Contractor payments
For contractors, clients may withhold taxes from payments made, often called ‘Pay-As-You-Go’ (PAYG) withholding.
This is typically applied when the contractor does not provide the client with a Tax File Number (TFN). In such cases, the payer must usually withhold a higher tax rate.
FAQs
Is Tax Collected at Source Refundable?
Yes, tax collected at source can be refundable depending on an individual’s tax liability for the year.
I.e., if the amount of tax withheld is too much throughout the year, you can claim a refund by the time you file your annual return.
Tax withheld at source: The rate and its calculation
In Australia, tax collected at the source rate depends on income and the current tax rates set by the government.
The government uses a progressive tax system to mean rates will increase depending on your income rise.
Employers use the tax calculator available through the government tax portal to determine how much tax they will take from each employee.
Conclusion
Tax at source is a key feature and need in the Australian tax system because it helps individuals and businesses comply with their tax obligations. What’s even better is that you can claim a refund if you have withheld too much tax during the year!
If you are in need of help with your taxes as an individual or business, contact us, and we will simplify the work for you! Book with us and get a free consultation today!
