Accounting for Tax Deducted from Interest/Dividends
If an institution/company pays you interest or dividends and they do not have your tax file number they will deduct tax at the marginal rate (at the time of writing, 48.5%).
Note that tax deducted in this way is unrelated to GST and does not appear on your Business Activity Statement. It is to be claimed back on your tax return or offset against other tax debts.
The basic procedure is that the 48.5% deducted needs to be put into an asset account in the balance sheet, since it is owed to you by the ATO:
- Determine an appropriate balance sheet account to use for the withheld tax (for example, 17630), and add this account to the chart.
- Create a bank account under Accounts Receivable, Banking, Set Up Bank Accounts called "Tax Withheld from Interest/Dividends". Enter the account chosen next to each of the External GL Code fields.
- Enter an invoice to the institution/company to represent the income/dividend received (at the full face value). Be sure to enter the applicable GST code. (GST is typically not applicable for interest/dividends received.)
- Enter a receipt for the cash received, choosing your normal bank account.
- Enter a receipt for the value withheld, choosing the "Tax Withheld from Interest/Dividends" bank account. Choose Direct Debit as the Form of Payment and answer Yes when prompted to mark the receipt as deposited.
When you have submitted your tax return and claimed back the tax withheld, the next step is to remove the value from the balance sheet.
If you have a net income tax debt:
- Enter a purchase from the ATO for the income tax payable (not including the withheld amounts).
For example, if your final income tax is $1,000 and you have accumulated withheld amounts of $100 (total owing to the ATO of $900), enter $1,000.
- Enter a payment for the existing withheld amounts using the "Tax Withheld from Interest/Dividends" bank account. (Continuing the example, $100.)
Note that this payment and the original receipt cancel each other out: one is a debit to the "tax withheld" account and the other is a credit.
- When paid, enter a payment for the remaining tax debt using your normal bank account.
If you have an income tax refund:
- Reverse the receipts previously entered against the "Tax Withheld from Interest/Dividends" bank account.
This cancels all the previous "tax withheld" entries and reinstates the withheld amounts as "owed" by the company/institutions involved.
- Enter an invoice to the ATO for the value of the income tax refund (not including the tax withheld).
If there was no tax refund from the ATO and you are simply receiving the withheld amounts back, skip this step.
Note the value of the tax refund is now represented in Accounts Receivable as amounts "owed" by the ATO and the institutions/companies that withheld tax during the year.
- Enter receipts against the ATO and the other companies/institutions to total the refund received.