When making payments of interest, dividends, or royalties, it is crucial to understand resident withholding tax (RWT).
Understanding Resident Withholding Tax (RWT) on Interest
Resident withholding tax on interest applies when a financial institution or business pays interest to a resident taxpayer and that resident taxpayer has not reported their tax file number to the financial institution or business. Instead of the resident taxpayer reporting and paying tax at a later stage, the financial institution or business deducts a portion of the interest amount before disbursing it. For example, suppose a resident taxpayer has earned $100 in interest from a term deposit with ANZ and suppose that taxpayer has not quoted their tax file number to ANZ. ANZ will withhold, say $47, and pay the remaining $53 to the taxpayer as interest. The remaining $47 will act as a tax credit which the taxpayer can apply to claim back when they lodge their income tax return for the year. This prepayment mechanism ensures tax compliance and minimises the risk of tax evasion.
When Does RWT Apply?
RWT on interest generally applies when the tax file number is not quoted and:
- A financial institution (such as a bank) pays interest on savings, term deposits, or investment accounts.
- A company pays interest to an individual or another company.
- Interest is paid on a loan where the borrower is required to withhold tax.
The withheld amount is then remitted to the ATO (Australian Taxation Office).
RWT Rates on Interest
The applicable RWT rate on interest depends on the recipient’s tax status (i.e. whether a tax resident or non-tax resident), Australia’s tax laws, and whether the recipient has provided their tax file number (TFN). In many cases:
- If the recipient provides a TFN, the withholding tax rate is lower or nil.
- If no TFN is provided, a higher RWT rate applies (for tax residents, the RWT rate is generally 47%)
- In Australia, the withholding tax rate on interest paid to non tax residents is typically 10% under most tax treaties
If you are unsure whether you are a tax resident or non tax resident, don’t hesitate to contact your local tax accountant Melbourne or business accountant (such as Nobel Thomas) for a no obligation free discussion.
Exemptions and Reductions
Certain payments may be exempt from RWT, including:
- Interest paid to exempt entities such as government bodies or charities.
- Interest payments covered under special tax treaties that allow for reduced or zero withholding tax.
How is RWT Reported and Paid?
The payer must:
- Withhold the applicable tax amount from the interest payment.
- Remit the withheld amount to the ATO within a prescribed timeframe.
- Issue statements or reports to recipients showing the amount withheld for tax reporting purposes.
For taxpayers receiving interest income, the withheld tax is often credited against their total tax liability when lodging their annual tax return with the ATO.
Consequences of Non-Compliance
Failure to withhold and remit RWT can lead to:
- Financial penalties and interest charges.
- Audits and potential legal action from the ATO.
- Additional tax liabilities imposed on the payer.
Conclusion
Resident withholding tax on interest paid ensures tax compliance and upfront collection of tax revenue for the ATO. Whether you are a business making interest payments or an individual earning interest income, understanding RWT obligations is essential for proper tax management. Always check with a business accountant or tax accountant Melbourne to ensure compliance with applicable laws and regulations.
