PAYG Withholding for Subbies

Paying an ABN invoice does not always mean "pay it gross". There are specific situations where you, the principal, must withhold PAYG before you pay a subbie or labourer — and getting it wrong (especially the no-ABN rule and disguised employees) lands the liability on you. Here is when you withhold, the 47% no-ABN rule, and how it hits your BAS.‍‌​​‌​​‌​​​‌​​‌‌‌​​​​‌​​‌‌​‌‌​​‌‌‍

When you must withhold

You do not withhold on every ABN invoice — only where a PAYG-withholding obligation exists:

• Employees — wages, allowances, bonuses, directors' fees → always withhold using ATO tax tables.
• Labour-hire — if you operate as a labour-hire firm paying individual workers, treat it like wages and withhold.
• Voluntary agreement — a genuine ABN contractor signs a voluntary agreement with you → withhold per the agreement.
• No-ABN payments — a supplier who should quote an ABN but does not → withhold at the no-ABN rate (below).

In practice: a genuine ABN contractor who quotes a valid ABN and has no voluntary agreement → pay gross, no PAYG (but you may still report them in your TPAR). An individual who is really an employee (your hours, your control, your gear, only works for you) → withhold PAYG even if they send an ABN invoice (and pay super — see Super for Contractors & PSI).

The no-ABN withholding rule — 47%

If you run an enterprise and pay another enterprise for goods or services, and they do not quote an ABN, and no exception applies, you must withhold 47% of the payment:

• Threshold: it generally applies where the payment is more than $75 (ex-GST).
• Exceptions: include small-value payments and wholly private or domestic supplies.
• On the BAS: the 47% goes at label W4 (amounts withheld where no ABN quoted) — not W2.
• If they later supply a valid ABN: no retrospective withholding. If they never do, you withhold, remit the 47%, and give them a payment summary so they can claim the credit.

This rule exists so suppliers cannot operate outside the system — but the obligation (and the penalty for getting it wrong) sits with you, the payer.

Genuine subcontractor or disguised employee?

The ATO looks at the whole relationship, not just whether there is an ABN. No single factor decides it:

• Control — do you direct how and when the work is done?
• Integration — are they part of your business, or running their own?
• Tools and equipment — whose gear?
• Risk and reward — do they carry commercial risk, profit and loss?
• Delegation — can they send a substitute?
• Multiple clients — do they work for others?

A brickie who uses their own tools, quotes a fixed price per job and works for several builders → genuine contractor: pay in full, include in TPAR, and withhold only under a voluntary agreement or the no-ABN rule. A labourer who turns up daily on your roster, under your supervision, using your gear, only for you → employee in substance: PAYG and super apply even with an "ABN invoice". (Full test: Employee vs Contractor & Sham Contracting.)

How it flows through your BAS

Register for PAYG withholding before you make any withholding payment, then on each BAS:

• W1 — total salary, wages and other payments (gross to employees and certain workers).
• W2 — amounts withheld from W1 payments.
• W4 — amounts withheld where no ABN was quoted (the 47% — separate from W2).
• W3 — other amounts withheld (e.g. TFN not quoted).
• W5 — total withheld (W2 + W3 + W4), which feeds the payment section.

At year end, if you report through STP you finalise STP and workers get their income statement via myGov — no separate payment summaries. If you do not use STP, issue PAYG payment summaries and lodge the annual PAYG withholding report.

Common mistakes

• Paying a no-ABN invoice gross instead of withholding 47%.
• Putting no-ABN withholding at W2 instead of W4.
• Treating a disguised employee as a contractor (PAYG and super land on you).
• Not registering for PAYG withholding before the first pay run.

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