TFN Withholding: 47% Top Rate When No Tax File Number is Quoted

The 47% rate

The 47% withholding rate applies to payments made to resident employees who have not provided a Tax File Number (TFN) and have not claimed a valid exemption. This rate is calculated as the top marginal rate plus the 2% Medicare levy.

This 47% rate has been in effect since 1 July 2017, when the top rate plus the temporary deficit levy was incorporated into the standard withholding rate for ‘no-TFN’ situations. Employers remit the withheld amount to the Australian Taxation Office (ATO) as part of their regular Pay As You Go (PAYG) withholding obligations under Schedule 1 to TAA 1953. STP Phase 2 reporting obligations apply to these withholdings.

If an employee subsequently provides a TFN within 28 days, the employer must adjust the withholding from the next payment. Any excess withholding is refunded by the ATO through the annual PAYG return.

Employer obligations

Employers are required to provide a TFN declaration form to each new employee upon commencement of employment. Employees must quote a Tax File Number (TFN) or provide an exemption notice within 28 days of starting work. If an employee fails to do so, the employer must withhold tax at the top marginal rate of 47% from the date employment begins.

Valid exemption codes exist for certain employees, including those under the age of 18, recipients of specific Centrelink payments, and pensioners who have provided a tax-offset declaration. Employers must ensure they correctly identify and apply these exemptions to avoid incorrect withholding. STP Phase 2 reporting obligations apply to TFN declaration data.

Employers have a responsibility to lodge TFN declaration data with the Australian Taxation Office (ATO) via Single Touch Payroll (STP) Phase 2 reporting. Failure to withhold the correct amount of tax makes the employer personally liable for the shortfall, plus applicable penalties and a general interest charge.

Investment income (Subdivision 12-E)

Subdivision 12-E of Schedule 1 to the *Tax Assessment Act* 1953 governs TFN withholding from investment income. This is separate from the rules applying to employment income outlined in Subdivision 12-B. Investment bodies are required to withhold 47% from payments of interest, dividends and unit trust distributions when an investor has not provided a Tax File Number (TFN) or Australian Business Number (ABN). FATCA and CRS in Australia explained can provide further context on international tax obligations.

For non-resident investors, the requirement is to quote tax residency status rather than a TFN. These investors are then subject to lower foreign-resident withholding rates, as determined by applicable tax treaties.

Joint account holders must each provide a TFN; if any account holder fails to do so, the 47% withholding rate applies to their share of the investment income. Amounts withheld are credited against the investor’s annual income tax assessment.

Practical employer steps

Employers must implement processes to ensure employees provide a Tax File Number (TFN). Onboarding should include a mandatory TFN declaration, triggering the 28-day timer from the employee’s start date. Payroll systems should automatically apply the 47% no-TFN tax scale to new employees until a valid TFN is received. Working holiday maker tax and super (417/462) should be considered, as this status does not exempt individuals from the no-TFN tax rate; working holiday makers without a TFN are taxed at 45% until a TFN is provided.

Accurate record-keeping is essential. Employers must retain records of TFN declarations for a minimum of 5 years to facilitate ATO audits. These records must be managed in accordance with privacy obligations under the TFN Rule, restricting the use and disclosure of TFN data.

Payroll staff should be trained to understand and apply these requirements. The system should be designed to automatically switch an employee’s tax scale to the standard rate once a valid TFN is captured and recorded.