If you’re an employer or other withholding payer in Australia, you need to know about TFN withholding tax. TFN stands for Tax File Number, a unique identifier that the Australian Taxation Office (ATO) uses to track income and tax payments.
TFN withholding tax is an important part of the Australian tax system. It helps ensure that everyone earning income pays their fair share of tax. In fact, it aids in simplifying the tax system for individuals and businesses alike. Moreover, it reduces the likelihood of errors and omissions in tax reporting.
In this article, we’ll discuss the basics of TFN withholding tax, including who is required to withhold tax, what payments are subject to tax, and how much tax is withheld. Additionally, we will highlight the consequences of not withholding tax.
So, whether you’re a new employer or just looking for a refresher on TFN withholding tax, read on for everything you need to know.
IN THIS ARTICLE
- What is TFN Withholding Tax?
- Who is Required to Withhold TFN Tax?
- What Payments Are Subject to TFN Withholding Tax?
- How To Determine TFN Withholding Tax For Employees?
- Withholding Requirements for Your Investment Income
- Types of Exemptions from Withholding Tax for Suppliers
- TFN Withholding for Closely Held Trusts
What is TFN Withholding Tax?
TFN Withholding Tax refers to the process of withholding a portion of an individual’s or investor’s income when they have not provided their Tax File Number (TFN), Tax Exemption Number or Australian Business Number (ABN) in Australia’s taxation system.
This withheld tax is reported on Tax Reports, ensuring transparency in the tax process. It’s important to note that when a TFN is not provided, the tax will be withheld at the highest applicable marginal tax rate, including the Medicare levy for the present tax year. This measure is implemented to ensure compliance and equitable taxation.
Who is Required to Withhold TFN Tax?
If you are an individual or entity making payments to someone in Australia subject to TFN withholding tax, you are required to withhold tax from those payments. This applies to employers, banks, financial institutions, and other businesses.
The amount of tax you withhold depends on the payee’s income and their tax-free threshold. Furthermore, the amount withheld from the TFN serves as a tax prepayment by the taxpayer whose funds have been withheld. When you file an income tax return as a taxpayer, you can claim a credit for the amount of tax withheld. If there is an excess of tax withheld, you can receive a refund by including it in your income tax return.
What Payments Are Subject to TFN Withholding Tax?
Payments subject to TFN withholding tax are payments of interest income or other investment income to someone who does not provide their TFN or ABN to the financial institution or investment body that pays them the income.
This includes payments from:
- Bank accounts
- Term deposits
- Bonds and other investments
- Payments for services rendered
- Payments for goods sold
- Prizes and winnings
- Other payments that are considered to be income under Australian law
However, TFN withholding tax does not apply to fully franked dividends from public companies or payments below the withholding threshold.
TFN withholding tax also applies to dividends, interest and royalties paid to non-residents of Australia. The withholding tax rates for these payments vary depending on the type of payment and the recipient’s country of residence. The payer must withhold the tax from the payment and remit it to the ATO.
How To Determine TFN Withholding Tax For Employees?
Determining the appropriate TFN withholding tax rate is a crucial responsibility for employers in Australia. This section provides a comprehensive guide to asses the TFN withholding tax based on employee declarations and other relevant factors.
Importance of TFN Declaration
A TFN declaration is essential for employers to accurately calculate the withholding tax rate for their employees’ payments. Employees must complete a TFN declaration, providing relevant information determining their withholding tax rate. In this respect, there are two different scenarios to consider:
1. TFN Withholding Tax Rate For Resident Employees
If a resident employee provides a valid TFN, the withholding tax rate is determined based on the individual’s declared circumstances, including tax-free threshold, residency status, and any applicable debts.
However, if an employee fails to provide a TFN or claims no exemptions, the withholding tax rate is 47% for resident employees.
Alternatively, if an employee indicates they have applied for a TFN or made an inquiry, they have 28 days to provide the TFN. If not provided within this timeframe, the withholding tax rate remains at 47% unless otherwise directed by the tax office.
2. TFN Withholding Tax Rate for Foreign Resident Employees
If a foreign resident employee does not provide a TFN, the withholding tax rate is 45% (ignoring any cents).
On the other hand, If a foreign resident employee provides a valid TFN, the withholding tax rate is calculated using the foreign resident tax rates provided by the tax office.
3. Incorrect TFN
If the tax office or software provider advises about an incorrect TFN on the TFN declaration, the employer must withhold tax at the top rate until the correct TFN is provided.
4. Employees Under 18 Years
Specific tax withholding rules apply when employing individuals under 18 years old in Australia. There are conditions under which employers are not required to withhold tax from payments made to employees in this age group. These include:
- The employee must not be above 18 years of age
- The employee has not provided a Tax File Number (TFN) declaration form (NAT 3092)
5. Payment Thresholds:
- The total payments must not exceed $350 if paying the individual weekly.
- The total payments must not exceed $700 if paying the individual fortnightly.
- The total payments must not exceed $1,517 if paying the individual monthly.
- The monthly threshold should be applied for one-time payments to an employee under 18 years old.
Other Points To Consider
Tax offsets and Medicare levy adjustments should not be considered in the withholding tax rate calculation when a TFN is not provided.
No amount for study and training support loans should be withheld when a TFN is not provided.
Thus, we can say that TFN withholding tax rate is an essential aspect of payroll management for employers in Australia. Employers can accurately calculate and withhold the appropriate tax amounts by understanding the requirements and guidelines outlined in employee TFN declarations.
Withholding Requirements for Investment Income
In Australia, tax withholding from investment income is important to understand as an investor. This section aims to provide comprehensive information on the subject, focusing on situations where investors have not quoted their TFN or ABN. Additionally, it sheds light on the various exemptions that may apply to investors.
Quoting Your TFN or ABN
When you receive investment income in Australia, you must provide your Tax File Number (TFN) or Australian Business Number (ABN) to the investment body. If you fail to do so, withholding requirements will apply. Remember to inform the investment body if you are exempt from quoting a TFN or ABN.
If you hold investments in a business capacity, such as through your company or business entity, you can quote either a TFN or ABN in connection with the investment. This allows flexibility in meeting your withholding obligations. Moreover, investment bodies are responsible for reporting the withheld amounts in the Annual Investment Income Report (AIIR).
Exemptions from Withholding
There are certain exemptions from withholding requirements that you may qualify for. These are:
- Fully franked dividends from public companies are exempt from withholding.
- If the total income paid to you for the entire financial year is below the withholding threshold, withholding provisions do not apply.
Withholding for Investors Deemed Not to Have Quoted a TFN or ABN
Another significant aspect of tax withholding for investment income is situations where investors have not provided a TFN or ABN. Let’s discuss the implications in detail:
1. Top Rate of Tax
If you are deemed not to have quoted a TFN or ABN, the investment body must withhold at the top rate of tax from future payments of your investment income subject to withholding. This top rate applies to all investors, including companies.
In such cases, the investment body will contact you and advise you to provide your correct TFN or ABN. This helps to avoid further withholding on your future investment income.
Also, the investment body will report the withheld amount in the AIIR, which should be the whole dollar amount without including cents. If cents have been incorrectly withheld, they must be included in the AIIR.
2. You Quote TFN or ABN After Withholding
The withholding requirements will cease if you later provide your TFN or ABN or claim an exemption. It is important to note that any withheld amounts should not be repaid to you directly. Instead, you can claim a credit for the withheld amounts when filing your income tax return.
Withholding for Franked Dividends and Joint Accounts
1. Franked Dividends
Fully franked dividends from public companies are not subject to withholding, even if you did not provide a TFN or ABN or claim an exemption. However, withholding is required for the unfranked portion based on a specific calculation for partly franked dividends with unattributed income.
2. Joint Accounts
If you have a joint account, at least two investors must provide a TFN or ABN or claim an exemption. If the joint account includes a resident and a non-resident, the withholding provisions apply based on the resident’s TFN or ABN obligations.
Thus, understanding tax withholding from investment income and being aware of the exemptions available can help you navigate the tax obligations associated with your investments and ensure compliance with Australian tax regulations.
Exemptions Available to Investors from TFN Withholding Tax
1. Exemption for Children Under 16
If you invest on behalf of a child under 16 years old (excluding shares in public companies), you may be exempt from tax withholding. To qualify for this exemption, the investment body should have records indicating that the child was under 16 years old on January 1 before the payment date. Additionally, the payment amount should be below $420 for the financial year or pro-rated if the payment is not for the entire year.
2. Exemption for Interest Bearing Accounts and Deposits
If you have interest-bearing deposits or accounts with a financial institution and have not provided a TFN or ABN, you may be eligible for an exemption from tax withholding. This exemption applies when the payment amount for the financial year is below $120, or pro-rated if the payment is not for the full year.
3. Exemption for Entities Not Required to Lodge an Income Tax Return
If your entity is not required to lodge an income tax return, you may not have tax withheld when a TFN is not provided. To qualify for this exemption, an eligible representative must supply the investment body with the entity’s name, address, and the reason why an income tax return is not required.
Examples of such entities include body corporates, unincorporated associations, charitable organizations, social and other non-profit organizations, and non-profit companies earning small amounts of income.
4. Exemption for Non-Resident Investors
You may have non-resident withholding tax applied to your investment income as a non-resident investor. This serves as a final tax, and if your investment income is your only assessable income in Australia, you won’t need to lodge an income tax return or have a TFN.
In this case, you are treated as if you quoted a TFN for the investment, ensuring the application of the non-resident withholding tax rate rather than the top tax rate. However, if you become a resident of Australia, you must inform the investment body within one month, and the non-resident exemption will no longer apply.
Types of Exemptions from Withholding Tax for Suppliers
When conducting business transactions with suppliers, it is crucial to be aware of the withholding tax requirements in relation to the ABN provided by the supplier. This section outlines the various exemptions available to you as a payer, ensuring compliance with tax regulations while facilitating smooth supplier interactions.
1. ABN Quotation by Suppliers
When a business supplies you with goods or services, they should provide their Australian Business Number (ABN). If they fail to do so, following actions will be taken:
- Withhold the top rate of tax from the payment made to them.
- Send the withheld amount to the tax authorities.
Suppliers with an ABN should provide you with invoices or other electronic/paper documents that quote their ABN in relation to the supply. You can also record their ABN if displayed on their website and keep it with your transaction records.
2. Withholding if ABN Not Provided
When a supplier fails to provide their ABN and the total payment for goods and services is more than $75 (excluding GST), it is usually necessary to deduct the highest tax rate from the payment and send it to the tax authorities. It is important to keep separate records for these transactions because you cannot claim the GST input tax credit for the withheld payments.
3. Payments Exempt from Withholding
Certain suppliers’ payments are exempt from withholding tax, irrespective of whether an ABN is provided or not. However, you must keep sufficient records to demonstrate the reason for not withholding. Examples of exempt payments include:
- Total payment of $75 or less (exclusive of GST).
- Payments made to suppliers whose income is exempt from tax, such as religious institutions, educational institutions, community service organizations, public and non-profit hospitals, and charities.
- Payments to suppliers who are not carrying on an enterprise and do not require or are not entitled to an ABN.
If you agree to provide goods or services instead of monetary payment, withholding tax still applies if the supplier provides no ABN.
You must remember that keeping accurate records and obtaining written statements from suppliers to support the exemptions claimed is essential. If you suspect false or misleading information, withholding tax may still apply.
TFN Withholding for Closely Held Trusts
Closely held trusts, including family trusts, have specific requirements regarding TFN withholding for trustees and beneficiaries.
Beneficiaries of closely held trusts must provide their TFNs to the trustee to avoid having amounts withheld from their payments or unpaid entitlements. By quoting their TFN, beneficiaries ensure the smooth processing of their payments and entitlements without any withholding.
When beneficiaries provide their TFNs to the trustee, the trustee must report the TFNs and other beneficiary details to the tax authorities. This reporting helps maintain accurate records.
1. Withholding in the Absence of TFN
If a beneficiary fails to provide their TFN before a payment or entitlement occurs, the trustee must withhold the applicable amount from the payment or entitlement. This ensures compliance with TFN withholding requirements and prevents any potential non-compliance issues.
In cases where withholding is necessary due to the absence of a beneficiary’s TFN, the trustee must pay the withheld amount to the tax authorities. Additionally, the trustee must submit an annual report that provides details of all withheld amounts from payments or entitlements.
2. Ensuring Compliance and Accuracy
The TFN withholding process for closely held trusts maintains compliance with tax regulations and facilitates accurate reporting of beneficiary information. By quoting their TFNs to trustees, beneficiaries contribute to smoothly and efficiently handling their payments and entitlements.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.