PAYG
Voluntary agreement
A voluntary agreement is a written arrangement between a contractor and a payer, registered with the ATO, under which the payer withholds PAYG tax from payments so the contractor avoids a large tax bill later.
A voluntary agreement is an arrangement in which a business that is not strictly required to withhold tax from payments to a contractor does so anyway, at an agreed rate, because both sides have chosen to enter into it. It is commonly used by independent contractors and sole traders who would otherwise have no tax taken out of their income and who would face a lump-sum tax bill, and potentially instalment obligations, at the end of the year.
The agreement is documented on an ATO form and must be completed by both the payer and the contractor. The contractor needs an ABN and usually a TFN, and the form sets out the type of work, the withholding rate and the period covered. It is usually in force until either party cancels it, though there are rules about how and when it can end. Once the agreement is in place, the payer must withhold from each payment at the rate that applies.
Withholding is by reference to the same sort of rate tables used for employees, although a contractor can ask for a different, fixed rate under the agreement. The payer then reports the amounts withheld on the BAS and pays them to the ATO by the due date. At year end the payer gives the contractor a payment summary or reports the amounts through the ATO's systems, and the contractor claims the credits when they lodge their return.
Voluntary agreements do not change the legal relationship between the parties. A contractor under a voluntary agreement remains a contractor, not an employee, and is generally not entitled to leave, super contributions or other employment benefits just because tax is being withheld. Equally, entering into one does not change GST obligations. If the contractor is registered for GST they still issue tax invoices and the payer still pays GST on top of the agreed price, and GST is not part of the withholding calculation.
Voluntary agreements can be helpful for cash flow planning because the contractor sets aside tax as they go. They also reduce the risk that the contractor will be caught out by PAYG instalments or a large tax debt. However, the withheld amount is only an estimate. If the contractor earns more than expected, additional tax might still be due when the return is assessed.
A common misunderstanding is to treat a voluntary agreement as a sign that the worker is an employee. Whether someone is an employee or contractor depends on the substance of the working relationship, not on whether tax is withheld. If you are not sure which category applies, the ATO has tools to help you decide.
This is general information only, so confirm the requirements for your own arrangements with the ATO or a registered tax professional.
Worked example
Dan is a freelance graphic designer who invoices a marketing agency about $4,000 a month. Dan and the agency sign a voluntary agreement with a fixed 20% withholding rate. For a $4,000 invoice (GST excluded), the agency withholds $800 and pays Dan $3,200 plus the GST on the invoice, if Dan is registered. The agency reports the $800 on its BAS, and Dan claims it as a credit in his tax return.
Practical tips
- Both parties need to sign the ATO form and keep a copy, because the payer cannot start withholding on a handshake alone.
- Check that the agreed rate is realistic. If it is too low, you may still owe tax after your return is assessed, and you may need to consider PAYG instalments.
- Do not confuse a voluntary agreement with an employment arrangement. It does not create entitlements such as super or leave.