Withholding tax on a bank account is tax the bank takes out of the interest you earn and sends straight to the ATO, before the interest reaches you. In Australia the usual reason it happens is that you have not given the bank your tax file number, in which case the bank is legally required to withhold tax from your interest at the top marginal rate plus the Medicare levy, which is 47%. It is not an extra tax or a penalty in the true sense; it is tax collected in advance, and you claim it back as a credit when you lodge your tax return. There are a few other situations where withholding applies, such as interest paid to someone living overseas, and some people are exempt. But for most Australians, the single thing to know is that quoting your TFN stops the bank withholding 47% of your interest, which is far more than you would normally owe.
What withholding tax actually is
Withholding tax is simply tax taken out at the source of a payment and remitted to the ATO on your behalf, rather than paid by you later. The idea appears in several places in the tax system, most familiarly in your wages, where your employer withholds PAYG tax from each pay. On a bank account, the same principle can apply to the interest the bank pays you: in certain circumstances the bank must hold back some of that interest and send it to the ATO, so you receive the interest already reduced by the tax taken.
The key thing to understand is that withholding is a collection mechanism, not a separate tax with its own rules about how much you ultimately owe. The amount withheld counts towards your final tax bill for the year. If too much was withheld, which is usually the case with bank account withholding, you get the excess back. So the question is rarely whether withholding costs you money in the end, and almost always whether it ties your money up unnecessarily in the meantime.
The main reason it happens: no TFN
By far the most common reason a bank withholds tax from your interest is that you have not quoted your tax file number on the account. When you open an account, the bank asks for your TFN, and quoting it is optional, you are never compelled to. But if you choose not to, the law requires the bank to withhold tax from the interest it pays you at the top marginal rate plus the Medicare levy, which comes to 47%.
That rate is deliberately high, because it is set at the top rate rather than your actual rate. For most people, whose real marginal rate is well below 47%, this means far too much tax is taken out. The system is designed this way so that there is a strong incentive to quote your TFN, and so that nobody can earn interest anonymously and avoid tax on it. The practical consequence is that forgetting to quote your TFN does not save you anything and simply hands the ATO a large slice of your interest upfront, which you then have to reclaim. Quoting your TFN is the simple fix, and our guide on how to pay less tax on interest income covers this among other points.
Quoting your TFN is optional but sensible
It is worth being clear that there is nothing wrong with declining to give your TFN; it is your choice, and the bank cannot refuse to open the account. The only consequence is the 47% withholding. So the decision is really about convenience and cash flow: quote it and your interest arrives in full, to be taxed at your correct rate when you lodge; withhold it and you lose nearly half the interest upfront and claim it back later.
For almost everyone, quoting the TFN is the sensible choice, because the withheld amount is just your own money held by the ATO until you lodge, earning you nothing in the meantime. The exception is people who have a genuine reason not to quote it, but even then the money is recoverable. If you have an old account where you never got around to providing your TFN, it is worth adding it, which you can usually do online or by contacting the bank, so future interest is not reduced.
The thresholds: when withholding does not apply
Withholding does not kick in on small amounts, which is why most people with a modest everyday account never see it even without a TFN on file. For banks, building societies, and credit unions, the general threshold is $120 of interest a year, or around $10 a month per account; below that, no tax is withheld even if you have not quoted your TFN. So a low-balance transaction account earning a few dollars of interest is not affected.
Children under 16 have their own threshold: their account interest is not caught by the TFN withholding rules while it is under $420 a year, provided the child’s date of birth has been given to the bank. This is separate from how a child’s interest is taxed overall, which we cover in our guide on who pays tax on a child’s savings account. Note that these thresholds apply to bank accounts; other investments such as dividends from public companies have no threshold, so withholding can apply from the first dollar if no TFN is quoted there.
How to claim withheld tax back
If the bank has withheld tax from your interest, you are not out of pocket permanently; you claim it back through your tax return. When you lodge, you declare the gross interest, the full amount before the tax was taken, and you also claim the amount withheld as a credit against your tax for the year. The ATO then works out your actual tax on all your income, subtracts the credit for what was already withheld, and refunds any excess. Because 47% is usually far more than your real rate on the interest, this normally produces a refund of most of what was withheld.
There is an important wrinkle on refunds. If tax was withheld simply because you did not quote your TFN, the bank cannot refund it to you directly; you must claim it on your tax return. If, on the other hand, an amount was withheld in error, the bank itself must refund it, but only if you apply before 30 June of the financial year in which it was withheld. And if you were entitled to an exemption but forgot to claim it, you can apply to the ATO for a refund. For the everyday no-TFN case, the route is always the tax return. This is one of several reasons it pays to declare all your interest accurately, which our guide on how interest on savings is taxed explains.
Who is exempt from TFN withholding
Some people and bodies can tell the bank they are exempt, so no tax is withheld even without a TFN and even above the thresholds. The main categories are specific pension recipients, children under 16 below their threshold, certain tax-exempt non-profit organisations, and foreign residents whose interest is dealt with under the separate non-resident rules described below.
For pensioners, the exemption covers people receiving certain government payments, such as the age pension or a carer payment, who can notify their bank of the payment type so withholding does not apply. It is worth noting that receiving a superannuation pension does not by itself make you exempt; the exemption attaches to the listed government payments. Tax-exempt non-profits can claim exemption by telling the bank they are not required to lodge a tax return. These exemptions exist so that people and bodies who would not owe tax on the interest are not subjected to withholding they would only have to claim back.
Withholding tax when you live overseas
A different kind of withholding applies to interest paid to someone who is a foreign resident for tax purposes, and it works quite differently from the TFN withholding above. If you are a non-resident of Australia and you have an Australian bank account earning interest, the bank withholds tax from that interest at a flat rate of 10%. This is non-resident interest withholding tax, and it is a specific rate set for interest paid to foreign residents, not the 47% no-TFN rate.
The 10% rate is the general rate, and it can be reduced if you are a resident of a country that has a tax treaty with Australia specifying a lower rate. Unlike the TFN withholding, which is just a prepayment you reconcile in a return, this non-resident interest withholding is generally a final tax: the 10% is usually all the Australian tax payable on that interest, and the non-resident typically does not then declare the interest again or lodge an Australian return just for it. If you are moving overseas or already living abroad with an Australian account, this is the regime that applies, and your residency status is what determines it. We explain the broader resident-versus-non-resident position in our guide on tax on offshore and foreign accounts.
Businesses and the ABN
Businesses face the same withholding trap, but they usually quote an Australian business number rather than a personal TFN on a business account. If a business account does not have the business’s ABN or TFN recorded, the bank must withhold from the interest at the top rate, exactly as for an individual, and the business then claims the credit in its return. For a company or other entity earning interest on a business savings account, quoting the ABN when the account is opened avoids this. The way that interest is then taxed depends on the business structure, which we cover in our guide on whether business savings accounts are taxed.
A worked example
Suppose you have a savings account earning $1,000 of interest in the year, and you never quoted your TFN. Because the interest is over the $120 threshold, the bank withholds 47%, so $470 is sent to the ATO and only $530 reaches you. When you lodge your return, you declare the full $1,000 of interest and claim the $470 as a credit. If your actual marginal rate is, say, 32.5% plus the Medicare levy, your real tax on the interest is about $345, so the ATO refunds you the difference of roughly $125. You end up taxed correctly, but you were out of pocket by $470 for months until you lodged, all of which could have been avoided by quoting your TFN and having the interest taxed at the right rate in the first place. The lesson the example makes concrete is that withholding does not change what you ultimately pay; it just takes too much, too early.
Why the system works this way
It can feel heavy-handed that the default is to take nearly half your interest, but the logic is sound. Interest is income the ATO wants declared, and before data matching was as good as it is now, interest was easy to leave off a return. Tying the withholding to the TFN gives everyone a strong reason to link their accounts to their tax identity, which both ensures the interest is reported and lets the ATO match it against returns. The high rate is the incentive; quoting your TFN is the easy way to avoid it. Seen that way, withholding tax on a bank account is less a trap than a prompt to connect your accounts to your tax file number, which almost everyone should do anyway.
Getting it right
In practice, the whole issue usually comes down to a few simple habits. Quote your TFN, or your ABN for a business account, when you open an account, and add it to any older account that does not have it, so no withholding occurs. If you are a pensioner or otherwise exempt, notify the bank so it does not withhold. If you live overseas, understand that the 10% non-resident rule applies instead. And whatever has been withheld, declare your gross interest and claim the credit when you lodge, so you recover anything taken in excess. Done properly, withholding tax need never cost you more than a short delay, and usually not even that.
If you are not sure whether tax has been withheld from your interest, or you want to make sure you are claiming back everything you are owed, we can check your position and handle it in your return.
How to tell if tax has been withheld
If you are not sure whether your bank has been withholding tax, there are a few easy ways to check. Your annual interest summary or the bank statement that shows your interest will usually show any tax withheld as a separate line alongside the gross interest, so a quick look tells you whether the amount you received was reduced. When you lodge, the ATO’s pre-fill information also often shows both the interest reported by the bank and any tax withheld on it, which is pulled straight from the bank’s reporting, so the figures appear in your return ready to check. If you use a tax agent, they can see this pre-fill data too, which is one more reason the withheld amount rarely goes unclaimed when a return is prepared properly.
The main thing to watch is a mismatch: if an account earned meaningful interest but you received noticeably less than you expected, withholding is the likely reason, and it is worth confirming your TFN is now recorded so it stops. Checking once and fixing the TFN is usually all it takes to prevent it recurring year after year.
Joint accounts and multiple accounts
Two practical points often come up. On a joint account, the interest is split between the holders, and the TFN position is assessed for the holders, so it is sensible for all account holders to have their TFNs quoted, not just one, to avoid withholding on anyone’s share. And where you have several accounts, the thresholds apply per account, but the TFN should be quoted on each one, because an old or forgotten account without your TFN can quietly have tax withheld even while your main accounts are fine. Running a quick check across all your accounts, not just the one you use most, is the way to make sure none of them is losing interest to unnecessary withholding.
