Tax file number

Tax File Number (TFN) is an 8 or 9 digit number issued by the Australian Taxation Office (ATO) to each taxpayer (individual, company, superannuation fund, partnership or trust) to identify that taxpayer's Australian tax dealings. When it was introduced in 1988, individuals received a 9 digit TFN and non-individuals were issued an 8 digit TFN. Now both are issued 9 digit TFNs. 10 digit TFNs are expected in the future, but none have yet been issued.

Strict laws ensure tax file numbers may be recorded or used only for specifically authorised tax-related purposes. Not all individuals have a TFN. A business has both an Australian Business Number (ABN) and a tax file number; and if income is earned as part of carrying on its business, it may quote its ABN instead of its TFN.

The TFN serves a purpose similar to the American Social Security number, but its use is strictly limited by law in order to avoid the functionality creep which has affected the US counterpart.

Operation

The primary purpose of the tax file number system is to allow the ATO to match income to the taxpayer who received it ("data matching"). Taxpayers file their tax returns at the end of the financial year, and the ATO can check their quoted income against records from the originators of that income, such as banks, employers, and public companies. Forms of income covered by the TFN rules include:

• Interest from banks and similar institutions, from all account types, including term deposits.
• Interest from bonds and debentures.
• Dividends from public companies.
• Distributions from unit trusts, including cash management trusts.
• Superannuation payments (amounts paid out to a beneficiary).
• Some government benefits, in particular unemployment benefits.

The recipient of such income has a choice between quoting a tax file number, or not doing so. In the latter case, tax is legally required to be withheld from payments at the top marginal rate and sent to the ATO. If the payee does quote his or her TFN, tax is withheld at a marginal rate based on the payee's income. The money withheld is a prepayment of tax. When the recipient files a tax return any so called "TFN amounts" are counted against his or her final liability, and any excess is refunded. Anyone not filing a tax return has been taxed at the maximum rate already.

As a general rule taxpayers do quote their TFN. Institutions usually help by reminding or inviting clients to do so on any new source of income (e.g., new accounts, new debentures, new shareholdings). Forms for quoting include a reminder of the key provisions of the system, for example from Computershare

It is not an offence to withhold your TFN or, where the securities are held for a business purpose, your ABN. However, if you do not provide your TFN or ABN, tax may be deducted from payments of interest and the unfranked portion of dividends and distributions at the highest marginal rate.

If an account is held in the names of multiple investors, each may choose whether to quote or not, but tax is withheld unless at least two have done so.

Issuing

Tax file numbers are issued by the Australian Taxation Office. The number itself is 8 or 9 digits, with a check digit. In the past, different number ranges were used to identify different types of taxpayers, but now the numbers have no such embedded meaning. A new taxpayer receives a tax file number within about a month of making an application and providing proof of identity.

Centrelink helps those applying for certain benefits to apply for a TFN at the same time, if they don't already have one. For example unemployment benefits are subject to TFN withholding if a TFN is not quoted. A young person applying for such a benefit for the first time may have never previously needed a TFN.

The ATO has a programme in secondary schools for the school to help students apply for a TFN. The school verifies the identity of the student, but otherwise has no part in the system (in particular the school never sees the student's TFN).

Foreigners in Australia whose visas permit them to work can apply for a TFN online, using their passport number and visa number. Proof of identity is established by checking those with the Department of Immigration.

Exemptions

Some people and organisations are exempt from TFN withholding; they may state their exemption category instead of quoting a TFN. This includes:

• Income tax exempt organisations (e.g., schools, museums).
• Non-profit organisations.
• Recipients of government pensions who are 80 years and older.
• Children under 16 (earning up to $420 per year of interest, in 2005).
• Foreign residents for interest and dividends (they're subject to non-resident withholding tax instead).

People and organisations in these categories may still need to submit a tax return, but generally speaking these exemptions mean those not needing to submit a tax return don't need to get a tax file number.

The exemption for children does not apply to company dividends, and if a bank account is held in more than one name it's only exempt if all account holders are under 16. Children can apply for a TFN and quote it in the same way as anyone else, if they wish.

For some forms of income, small earnings are exempt from TFN withholding for any account holder. For example bank interest up to $120 per year is exempt. (Such amounts are still taxable income though.)

Check digit

As is the case with many identification numbers, the TFN includes a check digit for detecting erroneous numbers. The algorithm is based on simple modulo 11 arithmetic per many other digit checksum schemes. The weighting digits of the algorithm have been kept secret within the Australian Taxation Office since its creation despite being communicated to more than 20,000 external entities in Australia, such as employers, investment bodies and software makers. However, the algorithm has since been reverse engineered and is an example of the failure of the principle of security through obscurity.

Calculation

To check the validity of a tax file number, multiply each digit by a weighting factor, sum the results and divide by 11. If the result is an integer (that is, if there is no remainder) the number is valid. For example consider the number 123456789 checked using the weightings given by this analysis of the TFN algorithm (1,4,3,7,5,8,6,9 and 10):

  1×1 + 2×4 + 3×3 + 4×7 + 5×5 + 6×8 + 7×6 + 8×9 + 9×10 =
  1 + 8 + 9 + 28 + 25 + 48 + 42 + 72 + 90 = 323
  323 / 11 = 29 with a remainder of 4, therefore not a valid TFN.

To validate 8 digit TFNs (previously issued to corporate bodies and trusts), the base TFN that is the first 7 digits (excluding the final check digit) is extended with a trailing zero.

So the (invalid) TFN 12345678 would be checked using the above algorithm as if it was the 9 digit TFN 123456708.

See also

• Taxation in Australia

• National Insurance number (a similar number in the United Kingdom)
• Social Insurance Number (a similar number in Canada)
• Social security number (a similar number in the United States)
• PPS number (a similar number in the Republic of Ireland )
• NHI Number (a similar number in New Zealand )

References

• Tax File Number and Australian Business Number Information for Savings Accounts and Investments, Australian Taxation Office, publication NAT 1628-10.2002
• Tax File Number essentials, at the Australian Taxation Office
• Secondary Schools TFN Program page, at the Australian Taxation Office
• The check digit algorithm of the TFN, by Frédéric Schütz
• Privacy Guidelines on the use of the TFN, at the Office of the Privacy Commissioner