Just like any other source of income, interest you earn from a savings account is subject to tax.
When you file your income tax return at the end of each financial year, you need to declare all your sources of income, including your salary and income earned from investments. If you have a balance in a savings account that has earned interest in the previous financial year, you’ll also need to declare this amount and pay tax on it.
But at what rate is the interest you earn taxed and how can you get the best possible investment returns from a savings account? Read on to find out.
Why do I need to declare interest?
Under its rules regarding investment income, the Australian Taxation Office (ATO) requires all Australian residents to declare any interest they receive as income. This includes:
- Interest from savings accounts and term deposits held with banks, credit unions and building societies.
- Interest received from a children’s savings account opened or operated by you.
- Interest paid or credited to you by the ATO.
- Life insurance bonuses (although tax offsets may be available).
- Interest earned from foreign sources (although tax offsets may be available).
How do I report my interest earned?
The interest you earn can be declared on your annual income tax return. Banks and other investment organisations are also required to report to the ATO details of the interest they pay to account holders and investors. This includes the amount of interest you received from various financial institutions, and the BSB and account numbers for the accounts in which the interest was paid. The ATO then matches the investment income you report with the amount reported by your bank, and if there are any discrepancies your tax return will be adjusted and fines may apply.
Remember, you don’t need to pay tax on the amount you deposit into your account as you will have already paid tax on this income. It is only the interest you earned on that money that is subject to tax.
At what rate is the interest taxed?
The amount of tax that applies to the interest you earn on your savings account will be determined by your overall taxable income. The total income you earn each year determines the tax rate you must pay, and the ATO’s tax rates for the 2017-18 financial year are shown below:
|Taxable income||Tax you must pay on this income|
|$0 - $18,200||Nil|
|$18,201 - $37,000||19c for each $1 over $18,200|
|$37,001 - $87,000||$3,572 plus 32.5c for each $1 over $37,000|
|$87,001 - $180,000||$19,822 plus 37c for each $1 over $87,000|
|$180,001 and over||$54,232 plus 45c for each $1 over $180,000|
Why should I provide my Tax File Number (TFN) to my bank?
When you open a savings account, your bank will give you the option of providing your TFN. While it’s not compulsory to do so, supplying your TFN is in your own financial best interests - if your bank doesn’t have your TFN, withholding tax may apply to the interest you earn on your account.
If you haven’t given your bank your TFN or if you’re a non-resident of Australia, the bank must withhold an amount from the interest you earn and send it straight to the ATO. This withholding tax is calculated at the top marginal tax rate of 45% plus the Medicare levy of 1.5%. For non-residents, the withholding tax rate is 10%. If your savings account earns more than $120 per year for adults (or $420 for children) during the financial year, withholding tax applies.
To avoid withholding tax, you can either supply your TFN when you apply for an account, or get in touch with your financial institution at any time to provide your TFN via internet banking, over the phone or at your nearest branch. This makes the process so much easier come tax time!
What about interest earned in a joint account?
The ATO assumes that joint account holders are equal owners of an account and requires them to pay tax accordingly. For example, if you have a joint savings account with your spouse, the interest paid will be split equally between the two account holders - 50% each. When it comes to completing a tax return, each partner or spouse need only claim their share of the interest earned on the joint savings account.Each person will then have 50% of the interest earned added to their taxable income.
However, if the beneficial ownership of the account is not split up into equal shares, you’ll need to provide documentation that proves this fact to the ATO. The documentation must show the source of the funds, the proportion of contributions from each person, and who used the funds in the account and the interest received.
What about interest earned on a children’s savings account?
One common point of confusion for many Australian taxpayers is the income tax requirements surrounding a child’s savings account. If a parent provides the funds for the child’s account and spends or uses the funds in the account as they wish, the parent must declare interest earned from the account on their own tax return.
However, in some cases the funds in the account will be made up of the child’s own money - for example, the child may deposit money given as a Christmas or birthday present, their pocket money, and funds they earn from a part-time job such as a paper round. If the funds in the account are not used by any person other than the child, the interest earned is classified as the child’s income. If the child’s only source of income is interest totalling less than $420 for the financial year, they will not have to file an income tax return. However, if the child is less than 16 years old and the interest earned it exceeds $420, they will need to lodge a tax return.
How do I find the best savings accounts for my tax needs?
- Compare interest rates. The rate of interest will obviously play a huge role in determining how quickly you can grow your savings balance. Compare interest rates between accounts to see which ones offer the best deal.
- Watch out for traps. Keep an eye out for some common traps attached to savings accounts. For example, an account may only offer the high interest rate advertised for a limited introductory period, while you may need to satisfy certain criteria (for example deposit a certain amount each month) in order to achieve the maximum rate of interest.
- Look at all the account features. The interest rate isn’t the only factor that affects whether or not a savings account is right for you. Check for hidden fees and charges, whether you are able to access your funds at any time, and how you can manage your account before deciding on the right account.
- Consider inflation. When considering the returns provided by a savings account, remember to take into account inflation as well as the tax you need to pay on interest. Factoring in the effects of inflation increases the overall effective tax rate on your savings balance, so it’s important to shop around for an account with a high rate of interest.
- Use a comparison service. Comparison services like finder.com.au offer a quick and easy way for you to compare the interest rates, features and fees of multiple savings accounts. Start comparing a range of accounts today.
- Ask your accountant for help. For any advice on savings account interest and how it will affect your income tax return, ask your accountant or financial adviser for expert assistance. Or you could consider using a tax agent to prepare your tax return, and save yourself the paperwork. In addition to saving you stress and hassle, using the services of a tax agent can unlock additional benefits, such as extending the deadline for submitting your tax return and maximising your return by claiming deductions. See our table below to help you choose the tax agent that's right for you.