Taxation Administration (Withholding Variation for Personal Services Income) Legislative Instrument 2023

Administered by Department of the Treasury

Legislation au F2023L00352 In force Legislative Instrument

Legislation content

Explanatory Statement

Taxation Administration (Withholding Variation for Personal Services Income) Legislative Instrument 2023

 

 

General outline of instrument

  1.                This instrument is made under section 15-15 of Schedule 1 to the Taxation Administration Act 1953 (the Act).
  2.                This instrument varies to nil the amount a personal services entity (PSE) is required to pay to the Commissioner, when it receives alienated personal services payments, in certain circumstances. It continues the existing arrangements under the legislative instrument Variation of withholding for personal services income (15/03/2013), which is due to sunset (and will be repealed by the instrument).
  3.                The instrument is a legislative instrument for the purposes of the Legislation Act 2003.
  4.                Under subsection 33(3) of the Acts Interpretation Act 1901, where an Act confers a power to make, grant or issue any instrument of a legislative or administrative character (including rules, regulations or by-laws) the power shall be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument.

 

Date of effect

5.                  This instrument commences on 1 April 2023.

 

Effect of this instrument

6.                  This instrument varies to nil the amount that a PSE is required to pay to the Commissioner under section 13-5 of Schedule 1 to the Act in cases where:

(1)               the PSE receives an alienated personal services payment that relates to one or more individuals’ personal services income:

(2)               the PSE pays salary or wages to the individual or individuals within 14 days after the end of the ‘PAYG payment period’ in which it receives the alienated personal services payment: and

(3)               the salary or wages paid by the PSE is equal to or greater than either

(a)               70 per cent; or

(b)               a ‘net personal services income percentage’;

of the gross personal services income (exclusive of GST) received by the personal services entity during the PAYG payment period.

7.                  If a PSE elects to use the net personal services income percentage, it will calculate the percentage using amounts from the previous income year in accordance with the method statement in section 4 of the instrument.

 

Compliance cost assessment

8.                  Compliance cost impact: Minor – There will be no additional regulatory impacts as the instrument is minor and machinery in nature OBPR 23-04246.

 

Background

9.                  Section 13-5 of Schedule 1 to the Act requires a PSE to pay an amount of tax to the Commissioner if it receives an alienated personal services payment that relates to an individual’s personal services income, and it receives the payment during a PAYG payment period for which it is a personal services payment remitter.

10.              The amount of tax that a PSE is required to periodically pay the Commissioner during the income year under Division 13 in Schedule 1 to the Act is an ‘amount required to be withheld’ by an entity from a withholding payment (as defined in subsection 995-1(1) of Income Tax Assessment Act 1997 (ITAA 1997)). As such, the Commissioner is empowered to vary these amounts (including to nil) under section 15-15 of Schedule 1 to the Act.

11.              The amount of tax that a PSE is required to pay is calculated using the method statement in subsection 13-5(2) of Schedule 1 to the Act.

12.              Step 2(a) of the method statement in subsection 13-5(2) of Schedule 1 to the Act requires the PSE to identify amounts that are included in an individual’s assessable income under section 86‑15 of the ITAA 1997 and relate to alienated personal services payments the PSE received during the PAYG payment period.

13.              The amounts that are included in the individual’s assessable income under section 86-15 of the ITAA 1997 are reduced by certain deductions calculated under section 86-20 of the ITAA 1997. These deductions can only be accurately worked out after the end of the income year, and this gives rise to a timing mismatch.

14.              The legislative instrument addresses this timing mismatch by varying to nil the amount of tax required to be paid under section 13-5 of Schedule 1 to the Act in the circumstances outlined in section 6 of the instrument.

15.              Varying the amount to be withheld to nil in these circumstances provides a more practical alternative instead of working out an amount to be withheld based on estimating the net amounts that will be included in the individual’s assessable income under section 86-15 of the ITAA 1997. This is because once a PSE pays salary or wages equal to or above one of the two percentages in subsection 6(c) of the instrument, the amount not paid as salary or wages is treated as an approximate proxy for deductions that a PSE is entitled to but cannot accurately calculate until after the end of the income year.

16.              The instrument also reduces compliance costs for PSEs, because they do not have to comply with section 13-5 of Schedule 1 to the Act in the circumstances specified in the instrument.

 

Consultation

17.              Subsection 17(1) of the Legislation Act 2003 requires the Commissioner to be satisfied that appropriate and reasonably practicable consultation has been undertaken before they make a legislative instrument.

18.              Broad public consultation was undertaken on this instrument for a period of 2 weeks from 7 February to 21 Februrary 2023.

19.              The draft instrument and draft explanatory statement were published to the ATO Legal database. Publication was advertised via the ‘What’s new’ page on that website, and via the ‘Open Consultation’ page on ato.gov.au. Major tax and superannuation publishers and associations monitor these pages and include the details in the daily and weekly alerts and newsletters that they provide to their subscribers and members.

20.              No comments were received as part of this consultation process.

 

Legislative references

Acts Interpretation Act 1901

Human Rights (Parliamentary Scrutiny) Act 2011

Income Tax Assessment Act 1997

Legislation Act 2003

Taxation Administration Act 1953


Statement of compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

 

Taxation Administration (Withholding Variation for Personal Services Income) Legislative Instrument 2023

This legislative instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

 

Overview of the legislative instrument

This legislative instrument is beneficial to personal service entities (PSEs) that receive alienated personal services payments. It varies the amount (to nil) that a PSE would otherwise be required to pay to the Commissioner in certain circumstances. It applies when a PSE receives alienated personal services payments that relate to income that is mainly a reward for an individual’s personal efforts or skills, the PSE pays out salary or wages to the individual within a particular timeframe, and the amount the PSE pays out comprises a particular proportion of the gross personal services income it receives.

This instrument addresses a timing mismatch problem that would otherwise arise for payments made by PSEs to the Commissioner under section 13-5 of Schedule 1 to the Taxation Administration Act 1953. It provides an alternative practical method for estimating the net amounts that will be included in an individual’s assessable income under section 86-15 of Income Tax Assessment Act 1997. Without this instrument, relevant PSEs would have to pay an amount of tax to the Commissioner every PAYG payment period, rather than retain this money until a related tax liability arises in the future after the income year when tax returns are assessed.

PSEs to which the instrument applies will also benefit from having lower compliance costs because they will not need to pay amounts of tax to the Commissioner on a periodic basis during the income year. It will continue the existing arrangements under the legislative instrument Variation of withholding for personal services income (15/03/2013), which is due to sunset (and will be repealed by the instrument).

 

Human rights implications

This legislative instrument does not engage any of the applicable rights or freedoms. It continues existing arrangements, to ensure that PSEs to which the instrument applies are not required to pay an amount of tax to the Commissioner until they have lodged their income tax returns at the end of the income year.

 

Conclusion

This legislative instrument is compatible with human rights as it does not raise any human rights issues.

Overview

The Taxation Administration (Withholding Variation for Personal Services Income) Legislative Instrument 2023, created under the authority of section 15-15 of Schedule 1 to the Taxation Administration Act 1953, was introduced to address a timing mismatch problem in the calculation of tax withholding for personal services income (PSI). This issue arises because deductions that reduce the assessable income under section 86-15 of the Income Tax Assessment Act 1997 can only be accurately calculated at the end of the income year. The instrument aims to provide a practical alternative to withholding tax payments from personal services entities (PSE) until the end of the income year when the tax returns are assessed. It achieves this by varying the withholding amount to nil in specific circumstances, which in turn reduces compliance costs for PSEs by eliminating the need to make periodic tax payments during the income year. The instrument replaces and repeals the existing legislative instrument Variation of withholding for personal services income (15/03/2013). It is a legislative instrument for the purposes of the Legislation Act 2003 and was subject to a two-week public consultation period from 7 February to 21 February 2023, with no comments received.

Scope and Application

The Taxation Administration (Withholding Variation for Personal Services Income) Legislative Instrument 2023 applies to personal service entities (PSEs) that receive payments relating to an individual's personal services income. The instrument modifies the tax withholding requirements for PSEs under section 13-5 of Schedule 1 to the Taxation Administration Act 1953, setting the withholding amount to nil under specific conditions. This applies to entities that pay salary or wages to the individual within 14 days after the end of the PAYG payment period and ensure the payment is equal to or greater than 70% or a calculated "net personal services income percentage" of the gross personal services income received during that period. The legislative instrument aims to address a timing mismatch issue by providing a more practical alternative for estimating net amounts included in an individual's assessable income. Additionally, it reduces compliance costs for PSEs by exempting them from periodic tax payments to the Commissioner during the income year, continuing the arrangements established in the previous legislative instrument, Variation of withholding for personal services income (15/03/2013), which is repealed by this new instrument.

Key Provisions

The main sections of this legislation (Taxation Administration (Withholding Variation for Personal Services Income) Legislative Instrument 2023) are sections 6, 13, and 15. Section 6 specifies the circumstances under which the amount that a personal services entity (PSE) is required to pay to the Commissioner will be varied to nil. This occurs when the PSE receives alienated personal services payments that relate to one or more individuals’ personal services income, pays salary or wages to the individual or individuals within 14 days after the end of the ‘PAYG payment period’ in which it receives the alienated personal services payment, and the salary or wages paid by the PSE is equal to or greater than either 70 per cent or a ‘net personal services income percentage’ of the gross personal services income (exclusive of GST) received by the PSE during the PAYG payment period. Section 13 explains the method statement for calculating the net personal services income percentage, and section 15 describes how the instrument addresses the timing mismatch problem by varying to nil the amount of tax required to be paid under section 13-5 of Schedule 1 to the Taxation Administration Act 1953 in the circumstances outlined in section 6. The obligations and requirements imposed by the Act on PSEs include the need to pay an amount of tax to the Commissioner if they receive an alienated personal services payment that relates to an individual’s personal services income, and they receive the payment during a PAYG payment period for which they are a personal services payment remitter. PSEs must also identify amounts that are included in an individual’s assessable income under section 86-15 of the Income Tax Assessment Act 1997 and relate to alienated personal services payments they received during the PAYG payment period. The amounts that are included in the individual’s assessable income under section 86-15 of the Income Tax Assessment Act 1997 are reduced by certain deductions calculated under section 86-20 of the Income Tax Assessment Act 1997. These deductions can only be accurately worked out after the end of the income year, and this gives rise to a timing mismatch. The legislative instrument addresses this timing mismatch by varying to nil the amount of tax required to be paid under section 13-5 of Schedule 1 to the Taxation Administration Act 1953 in the circumstances outlined in section 6 of the instrument. The instrument imposes no offences, penalties, or civil or criminal consequences for breach. However, PSEs that do not comply with the requirements of the instrument may be subject to administrative action by the Commissioner. The Commissioner may take action to ensure that PSEs comply with the requirements of the instrument, including issuing notices, conducting audits, and imposing penalties for non-compliance. The maximum penalty for non-compliance with the requirements of the instrument is not specified in the legislation.

Legal classification tags

Area of Law
Taxation Law
Instrument
Legislative Instrument
Concepts
Definitions & Interpretation
Repeal & Amendment
Compliance Obligations
Prohibited Conduct

Interactions

Authorises

All Versions

Sourced from the Federal Register of Legislation at 26 August 2026. For the latest information on Australian Government law please go to https://www.legislation.gov.au.