ABN vs TFN: Essential Guide to Taxation for Working in Australia

Planning to live and work in Australia?

There are a few things you will need before you begin your career Down Under, starting with an TFN or an ABN - maybe even both!

It’s very common for people to work on both types of tax numbers but it can cause significant confusion when it comes to filing their annual tax return.

We’ve decided to explain how this all works and end the confusion once and for all.

What is an ABN?

So firstly, let’s explain what they are for anyone who doesn’t know.

An ABN is an Australian Business Number and every business operating in Australia needs to have one.

Also, all self-employed people are required to have an ABN and quote it on invoices for work performed.

Common examples of occupations where an ABN might be required are trades such as carpentry, fundraising, and personal training.

What is a TFN?

A TFN is a Tax File Number which is required by anybody who wants to work in Australia.

This number is given to all employers when you start working and your employer will then deduct tax from your income under the PAYG (Pay As You Go) system.

Because tax is taken at source by your employers, generally speaking people don’t need to worry about having a tax liability at the end of the year.

Apply for TFN

More on TFN: Working in Australia: Tax File Numbers and TFN Declaration

Both numbers are issued by the ATO (Australian Tax Office) and you will need to obtain a TFN in order to get an ABN.

Our average Australian tax refund is AU$2600

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ABN & Taxation

In the case of an ABN, tax is not taken at source, the person raising the invoice and receiving the payment is receiving full payment for products or services so a portion of that income should be retained to meet the tax liability at the end of the financial year.

People are generally fine with understanding what their obligation is when they work solely on either the TFN or ABN model. The confusion usually only arises in situations when people have two jobs in the tax year where one is ABN and the other is TFN or indeed if they have a full-time role that is TFN but operate a small business that generates ABN income on the side, perhaps as a personal interest.

What is the tax-free threshold in Australia?

Before we explain what happens in the case of someone that works on both a TFN and ABN, it’s important to confirm that in the case of both these models people are entitled to avail of the tax free threshold (TFA).

This means that regardless of being on an ABN or a TFN you can still earn up to $18,200 tax free in the financial year.

Below, you can see an example of a case outline how the TFA system works for Australia tax returns.

Mike is working on both an ABN and TFN and has been in Australia for the full tax year (meaning he is entitled to full TFA).

Mike earned the following:

ABN: 15,000

TFN: 15,000 (Net Income) and Tax withheld of $5000

In this case, Mike has a combined income of $30,000, and under the TFN he has already paid $5,000 in tax. We know that he has been in Australia for the full tax year and has a full TFA which means his taxable income is really $11,800 (Total of $30,000 – TFA $18,200).

As per the ATO tax tables based on his earnings, he will be liable for 19% tax on the $11,800 which will mean that the tax liability is $2,242.

Under his TFN employment, he has already paid $5,000 in tax which means that he has overpaid tax based on their income and as a result will be due a refund of $2,758 ($5,000 - $2,242).

In other cases where people’s income is higher, there can indeed be a liability but what we are trying to highlight here is that the tax paid via TFN work is taken into consideration as part of assessing your ABN income and associated tax liability.

It's also important to remember that people can use work-related expenses to reduce any liability that might exist, for example work-related courses, protective gear, tools, etc.

Our average Australian tax refund is AU$2600

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