Your win is tax free. What it earns is not.

What Australia taxes, and what it does not

The prize is a windfall. The yield is income.

The ATO does not treat an ordinary lottery prize as assessable income. It is a windfall gain, the same category as a gift or an inheritance, so there is no withholding, no declaration on your return, and no tax on the prize whether it is $10 or $200 million. That is the position for the Australian draws. A prize won on one of the overseas games is a separate question, and the next section deals with it rather than assuming the same answer.

That protection stops at the bank door. Once the money is sitting somewhere earning something, that something is ordinary income:

• Interest from a savings account or term deposit is fully taxable at your marginal rate, in the year it is credited.
• Dividends from shares or an index fund are taxable, though franking credits attached to them soften the blow considerably.
• Rent from a property you buy is taxable, less the deductions that come with owning it.
• Capital gains arrive only when you sell. Hold an asset more than twelve months and the 50% capital gains discount means only half the gain is added to your income.
• Gifts to family are not taxed. Australia has no gift or inheritance tax, so handing your sister $200,000 creates no tax event for either of you. What it can affect is a Centrelink payment, since gifting rules cap the amounts that get disregarded.

The uncomfortable arithmetic is that a single person with no other income and a $40 million prize in a savings account crosses into the top bracket within the first three weeks of the financial year. Everything after that is taxed at 45% plus levies.

If you won on one of the overseas games

This site lists six international games, so the windfall rule above is not the whole story and it would be careless to let it read as though it were. Start with what the product actually is, because the tax follows from that. You are not buying a foreign ticket. You buy a ticket in an Australian lottery conducted by The Lottery Office under Northern Territory Internet Gaming Licence IGL1001, and the operator buys a matching ticket in the overseas draw so it can pay out. Their account terms are explicit that the overseas ticket is not yours: you "will not own any Foreign Lottery Ticket and will make no claim in relation to the same".

What follows is what the operator states on its own site. We are quoting it rather than interpreting it:

• No Australian tax on the prize. Their FAQ says there are no Australian taxes payable on winnings from their lotteries. That sits consistently with the ATO windfall treatment above, and it is their statement about their product rather than our conclusion about your return.
• Some games are taxed in the source country before the money reaches you. Their terms name USA Power Lotto and USA Mega Lotto prize amounts of USD$1,000 or more, and Italian Super Jackpot amounts over €500, as subject to tax. For the US games their FAQ states 24% federal withholding on winnings over USD$5,000, plus a state tax that varies by the state the matched ticket was bought in and will not exceed 8%, all deducted from the prize before payment. So the amount that lands in your account can be smaller than the amount you won, and that happens before any Australian question arises.
• Reporting is yours. Their account terms put it on the customer: you are solely responsible for the reporting and payment of any taxes and charges arising on amounts paid or transferred to you.

On the two US rates you will see quoted, including elsewhere on this site. The United States runs two separate regimes and they do not overlap. A foreign claimant is withheld at 30%, whether that is a non-resident individual under section 1441 or a foreign company under section 1442, and Australia has no treaty relief from it: the exempt country list in IRS Publication 515 does not include us. A US person is withheld at 24% on prizes over USD$5,000 under section 3402(q), and the regulation under that section expressly excludes payments made to a non-resident alien individual or a foreign corporation, which is why the two figures are not a contradiction so much as two different questions. The operator quotes 24%, which is the US person figure, while their own terms say the overseas ticket is theirs and they are an Australian company. Reconciling those would need to know who is the payee of record in the United States and in what capacity, and that is not published anywhere we could find. So we will not tell you a rate. What is settled is that US tax comes out before the money reaches Australia.

Nor will we tell you what your own position is, because it depends on the operator's arrangement for the game you played and on circumstances this page cannot see. Check the operator's terms and product disclosure statement for that game, and check your own position with the ATO. On a large overseas prize, pay a registered tax agent before you move any of it.

For the calculator above, the practical point is simple: it models money that is already sitting in an Australian account. If you won on an overseas game, enter what you actually received after any deduction at source, not the advertised jackpot.

Three things that catch winners out

The Medicare levy surcharge. If your income for surcharge purposes tops $105,000 as a single, or $210,000 as a family, and you did not hold private hospital cover for the whole year, the surcharge applies to your entire income, not just the part above the threshold. At the top tier that is 1.5%. On $2 million of interest, that is $30,000 for a policy you never bought. It is one of the rare tax lines you can lawfully reduce to zero by buying something cheaper than the tax.

Quarterly instalments. Interest and dividends arrive with no tax taken out, so your first tax bill lands as one enormous lump. After that first return, the ATO enters individuals into the PAYG instalment system automatically once instalment income reaches $4,000, tax payable on the last assessment reaches $1,000, and estimated tax for the year reaches $500. From then on you prepay quarterly. It is not extra tax, just the same tax earlier, but the cash flow surprises people who assumed tax time was once a year.

Centrelink. A prize is assessed as an asset, and the income it earns is assessed as income. Deeming rules apply to financial assets regardless of what they actually earn. Any significant change in your circumstances has to be reported within 14 days, and a large win will end most income tested payments, including JobSeeker, Age Pension, Family Tax Benefit and rent assistance.

How franking credits change the tax on dividend income

Franking is the genuinely unusual feature of the Australian system. A company that pays tax at 30% on its profits and then distributes those profits attaches a credit for the tax already paid. You declare the cash dividend plus the credit as income, then subtract the credit from your tax bill. Because it is a refundable offset, someone with little other income can end up receiving cash back from the ATO on dividend income, which never happens with bank interest.

For a top bracket taxpayer, franking narrows the gap rather than closing it: the credit covers 30 points of a 47% liability. For a winner with no other income living off a modest dividend stream, franking can wipe out the tax entirely. Switch the calculator between a savings account and an ASX index fund at the same headline percentage and the difference shows up immediately.

None of which makes shares safer than a bank. Deposits up to $250,000 per person per institution are covered by the government guarantee. Share prices fall. The calculator above models income, not risk, and the two are not the same question.

Assumptions and sources

What is under the bonnet

Frequently asked questions