Terms of endearment # 5

PAYG Withholding: Pay As You Go Withholding is what was once called Group Tax and is the amount that must be withheld from employee's wages or salaries and sent to the ATO via the BAS.

At the end of the financial year what were once called Group Certificates have now been replaced by PAYG Payment Summaries. Each employee's gross income, and the amount withheld in tax, is recorded along with other information such as allowances, Reportable FBT amounts and Lump Sum Payments.

PAYG Instalments: Pay As You Go Instalments are amounts of tax payable for individuals who are not on wages or salaries and for companies or superannuation funds. It allows payment of tax ahead of time to be credited on a person or entity's tax return.

Terms of endearment # 4

Something that often causes confusion with taxpayers are the accounts that the ATO maintain in each taxpayer's name. There are sometimes more than two, but for the moment we will cover the two most common.

Integrated Client Account (ICA): This account is active if you receive a BAS or IAS and is a kind of dump account for all the obligations that you have in regard to your BAS. If you are registered for GST, PAYG Withholding and are asked to pay PAYG instalments, then all three components are debited to this account and your payments are credited against them.

Taxation Account: This account is active if you have ever lodged a tax return in Australia. It holds each year's income tax result (whether refund or payment) and credits any payments made to clear outstanding amounts. If you have paid PAYG instalments, these are credited across at the same time as lodgement.

What catches a lot of people is why they are having to pay two different accounts. If you have not made all of the payments to the ICA account and part of your obligation was PAYG Instalments, the ATO will still credit the instalments to the Taxation Account despite you not paying them. The result of this is that you still need to pay the ICA account. If there is still an amount payable even after the PAYG Instalments are credited then that residual amount will be payable on the Taxation Account.

If there is a credit in either the Taxation Account or the ICA, the ATO will transfer any credit against any existing payment liability.

And remember, if you are operating as a partnership then the partnership will have an ICA account which will deal with GST and/or PAYG Withholding but each partner will have their own Tax Account in their own name (a partnership doesn't pay income tax, only the partners do).

Terms of endearment # 3

The ATO can send two different forms to certain taxpayers each quarter, both of which can cause confusion to those who receive them.

Business Activity Statement (BAS): The BAS is a composite form collecting figures on a variety of different taxes and rebates. This form is sent to companies, trusts, partnerships and individuals who operate a business in Australia.

The return obtains details regarding:

• Goods and Service Tax (GST)
• Pay As You Go Withholding Tax (PAYGW) - this is employee group tax
• Pay As You Go Tax (PAYG) - this is personal or company tax instalments
• Fringe Benefits Tax (FBT)
• Wine Equalisation Tax
• Luxury Car Tax
• Fuel Tax Credits

As you can see it covers a wide assortment of taxes primarily related to business activities of which an entity may have three or four at any one time.

Income Activity Statement (IAS): The IAS is sent to anyone receiving taxable income that does not have tax withdrawn through the year (either through PAYGW amounts from wages or PAYG instalments on BAS statements).

IAS statements are primarily sent to individual partners of a partnership, trust beneficiaries, sole traders who aren't registered for GST or employ anyone, self managed superannuation funds and individuals who receive income such as dividends, interest or positively-geared rental receipts.

Therefore partners of a partnership may receive a BAS in regard to the partnership if they are registered for GST or employ someone, and also each receive an IAS to obtain PAYG instalments for themselves personally.

Terms of endearment # 2

Let's see if we can unravel another one of those 'not-so-clear' terminologies that the ATO love to throw at us. These two sound the same but are vastly different.

Imputation credits: These are credits that are raised from franked dividends that a person or entity may receive.

Basically, a dividend is a distribution of profits held within a company to the shareholders (the owners of the company). If the dividend is paid from profits that have not been taxed, it will be an unfranked dividend which is simply added to the person/entity's income (much the same as interest).

If the dividend is paid from profits that have been taxed, it will be a franked dividend. Franked dividends have imputation credits attached that allow a tax credit of 30% of the dividend amount to be used. The reason for this is as the company has already paid tax on the profit at the 30% company tax rate, it would be unfair that the shareholder be slugged with tax again on the same amount. Therefore the imputation credit allows the shareholder to claw back the company tax amount in their own return.

Input tax credits: When calculating a person's Goods and Service Tax (GST) position, input tax credits are the amount of GST paid on goods and services that have been purchased by the client in relation to the business they are operating. Therefore they can claim those amounts as credits against the GST they have collected from the business income.

Sometimes a person/entity may have more input tax credits than GST collected which will generate a refund for that period.

More definitions coming soon!