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 their Australian tax dealings. In the past, 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 only be recorded or used 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 TFN.

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 banks, employers, etc. 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, debentures, etc.
* 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 their tax file number, or not doing so. In the latter case, tax is withheld from payments at the top marginal and sent to the ATO. If the payee does quote their 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 their tax return any so called "TFN amounts" are counted against their 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 a new account, shareholding, etc. 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 checksum (below). 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 (eg. schools, museums).
* Non-profit organisations.
* Recipients of government pensions.
* 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.)

Other

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

Checksum algorithm

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. It had been kept secret within the Australian Taxation Office since its creation in the early 1970s in an attempt to avoid people deliberately creating fake but valid-looking numbers. Since then, the algorithm has been communicated to more than 20,000 external entities in Australia, such as employers, investment bodies, software makers, etc, and each of these entities had to sign a confidentiality agreement to make sure that the algorithm was kept secure. However, the algorithm has since been easily reverse engineered and is an example of the failure of the principle of security through obscurity.

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 a valid number and an invalid number (555000555 and 123456789) checked using the weightings given by [http://bioinf.wehi.edu.au/folders/fred/tfn.html this analysis of the TFN algorithm] (1,4,3,7,5,8,6,9 and 10):

Since 11 divides 165 without remainder (165 ÷ 11 = 15), 555000555 is therefore a valid TFN.

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.

Note: 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.

Therefore the 8-digit TFNs: 12345678 (invalid) and 32547689 (valid) would be validated as 123456708 and 325476809

1*1 + 2*4 + 3*3 + 4*7 + 5*5 + 6*8 + 7*6 + 0*9 + 8*10 =

1 + 8 + 9 + 28 + 25 + 48 + 42 + 0 +80 = 241

241 / 11 = 21 remainder 10 therefore not a valid TFN

3*1 + 2*4 + 5*3 + 4*7 + 7*5 + 6*8 + 8*6 + 0*9 + 9*10 =

3 + 8 + 15 + 28 + 35 + 48 + 48 + 0 + 90 = 275

275 / 11 = 25 remainder 0 therefore a valid TFN

References

* [http://www.ato.gov.au/nonprofit/content.asp?doc=/content/30712.htm "Tax File Number and Australian Business Number Information for Savings Accounts and Investments"] , Australian Taxation Office, publication NAT 1628-10.2002

* [http://www.ato.gov.au/individuals/pathway.asp?pc=001/002/001 Tax File Number essentials] , at the Australian Taxation Office

* [http://www.ato.gov.au/youth/content.asp?doc=/content/39656.htm Secondary Schools TFN Program page] , at the Australian Taxation Office

* [http://bioinf.wehi.edu.au/folders/fred/tfn.html The check digit algorithm of the TFN] , by [http://bioinf.wehi.edu.au/contacts/details_schutz.html Frédéric Schütz]

* [http://www.privacy.gov.au/act/tfn/ Privacy Guidelines on the use of the TFN] , at the Office of the Privacy Commissioner