Entity Setup
Entity Setup and Compliance: Navigating Draft PAYG Withholding Variations in Australia
Recent ATO draft instruments clarify withholding obligations for insurance, compensation payments, and payments to directors, altering compliance burdens for entities and individuals alike.
By NomadicTax Research Team • 5-8 min read • November 18, 2025
## Background: What Is PAYG Withholding Variation?
Pay As You Go (PAYG) withholding is Australia’s mechanism for collecting income tax at the source. Payers generally withhold a portion of payments to individuals who do not quote an ABN (Australian Business Number), among other conditions. Draft legislative instruments propose changes in how this applies to certain payments. ([au.andersen.com](https://au.andersen.com/november-2025-monthly-tax-update/?utm_source=openai))
## Key Proposed Changes
- **Draft Instrument LI 2025/D18** proposes that payments made by insurers, statutory compensation scheme operators, or compulsory third-party scheme operators, when settling claims **without an ABN**, will **not** require withholding. This removes uncertainty for many recipients of insurance and compensation payments. ([au.andersen.com](https://au.andersen.com/november-2025-monthly-tax-update/?utm_source=openai))
- **Draft Instrument LI 2025/D24** addresses payments made to individuals who must remit the entire payment to another entity (for which they are director, partner, or employee). It proposes to reduce withholding to nil and relax reporting under Single Touch Payroll (STP), aligning the treatment more closely with circumstances where payment is effectively funneled to an entity. ([au.andersen.com](https://au.andersen.com/november-2025-monthly-tax-update/?utm_source=openai))
## Implications for Entity Setup and Tax Compliance
### Entities, Directors, and Payment Flow
- If you're structuring payments through entities where individuals are placeholders (directors, employees) but all funds flow to another entity, these changes simplify your withholding obligations. However, documentation must clearly establish that the entire amount is remitted to the entity.
### Insurance and Compensation Payments
- Recipients of insurer or compensation scheme payments will benefit from clarity and reduced withholding risk—especially those who don’t have an ABN at the time of payment.
- Entities handling compensation payments will need to adjust their systems and procedures to apply the exemptions properly, ensuring you confirm when ABNs are missing and whether LI 2025/D18 applies.
### Use in Structuring and Setup
- Entities may consider structuring payment relationships so that individuals who hold roles (like director or committee member) receive and pass on funds via entities to access the nil withholding benefit under LI 2025/D24.
- When setting up trusts, companies, or partnerships with entities involved in receiving payments, clarity around ownership, ABNs, and remittance responsibilities will be more critical than ever.
## Actionable Steps for Businesses and Setups
1. **Review existing agreements** where individuals receive payments but funnel them elsewhere—reset contracts or payment terms if necessary.
2. **Update payroll and finance systems** to recognize when the draft variations apply, flagging eligible payments for nil withholding and adjusting STP reporting behavior.
3. **Maintain documentation** showing the arrangement—proof of remittal, entity ownership, ABN status.
4. **Monitor draft instrument finalization**—once these become law, some effective dates may trigger retrospective compliance if payments were handled differently.
5. **Consult your tax advisor** to ensure senior leadership or owners understand these changes, as misapplication could lead to penalties or missed opportunities.
## Example Scenario
ABC Pty Ltd pays Mr. Smith, a director, an allowance for travel expenses. Under LI 2025/D24, if Mr. Smith immediately remits the entire allowance to another entity (e.g. a consulting company he owns), then no PAYG withholding is required, and STP reporting obligations may be reduced. To comply, ABC Pty Ltd must have written arrangements confirming the remittance and ensure no partial retention occurs.
## Conclusion
These draft instrument changes offer significant relief in specific situations but also create new compliance checkpoints. Entities should adapt proactively—review contracts, update systems, gather evidence, and prepare for when the final law takes effect. Correctly implemented, the support simplification and certainty are valuable.