When is term deposit interest taxable

Paying tax on term deposit interest

When do you need to pay tax on the interest you earn on a term deposit? Read on to find out.

If you’ve invested money in a term deposit, it’s important to remember that you will need to pay tax on the interest income you earn. But at what rate are your interest earnings taxed and if your investment term is over several years, in which year do you need to declare the term deposit interest on your tax return?

Let’s take a closer look at when term deposit interest is taxable and how you can make sure you meet all your obligations to the ATO.

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Term deposits you can compare today

Rates last updated February 24th, 2018
$
Name Product 3 Mths p.a. 4 Mths p.a. 6 Mths p.a. 9 Mths p.a. 12 Mths p.a. 24 Mths p.a. Min Deposit Interest Earned
Citibank Term Deposit
-
-
2.70%
-
-
-
$75,000
Citibank Term Deposit $250,000+
-
-
2.98%
-
-
-
$250,000
St.George Term Deposit
2.05%
1.85%
2.15%
1.90%
2.45%
2.50%
$1,000
BankSA Term Deposit
2.05%
1.85%
2.15%
1.90%
2.45%
2.50%
$1,000
Westpac Term Deposit
2.00%
1.85%
2.05%
1.90%
2.30%
2.40%
$5,000
Bank of Melbourne Term Deposit
2.05%
1.85%
2.15%
1.90%
2.45%
2.50%
$1,000

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Is term deposit interest taxable?

As an Australian resident, you must pay tax on all the income you receive each year, including interest income earned from savings accounts and term deposits. So if you’ve been paid interest on a term deposit in the past financial year, you’ll need to declare that amount on your next tax return.

How much tax will I pay on term deposit interest?

The interest you earn on your term deposit will be taxed at the same marginal tax rate that applies to the rest of your income. The table below shows the ATO’s marginal tax rates for the 2016–17 financial year.

Taxable incomeTax you must pay on this income
$0 to $18,200Nil
$18,201 to $37,00019c for each $1 over $18,200
$37,001 to $87,000$3,572 plus 32.5c for each $1 over $37,000
$87,001 to $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

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When do I need to declare term deposit interest?

If your term deposit has a term of less than one year, you will need to declare any interest payment you receive in your tax return for that year. However, if you have invested your money for a period of longer than 12 months, when you declare your income depends on when your deposit matures and when interest is paid on your account.

If interest is paid at maturity, you will need to declare that interest on your tax return for the year in which your investment matures. However, if interest is credited to you throughout the term, for example if you receive monthly or half-yearly interest payments, you will need to declare any interest earned for the financial year in which it was credited to your account.

What if I decide to roll over my interest earnings into a new term deposit?

When a term deposit matures, many people choose to automatically roll over their initial deposit and any interest earned into a new term deposit account. However, if you choose this option and re-invest your interest rather than accessing it, you will still need to declare the interest on your tax return.

What happens if it’s a joint account?

If your term deposit is a joint account, for example if you share ownership with your spouse, the ATO assumes that each person has equal beneficial ownership of the funds in the account. The interest paid each financial year is therefore equally apportioned to each account holder – 50% each if there are two account holders and 25% each if there are four account holders.

However, if the beneficial ownership of the account is not split into equal shares, you’ll need to provide documentation to the ATO to prove the amount of your share.

Why should I provide my Tax File Number (TFN) to my bank?

When you’re filling out the paperwork to apply for a term deposit, one of the questions you’ll be asked is whether you would like to provide your TFN. While it’s not compulsory for you to supply your TFN to your bank, doing so is worth your while.

If you don’t give your TFN to your bank, the bank is required to deduct withholding tax from the interest you earn and send it straight to the ATO. The bank will make the deduction at the highest marginal tax rate of 45%, plus the Medicare Levy of 1.5%.

Withholding tax applies to accounts that earn $120 of interest or more per year – this figure rises to $420 for children’s accounts – so keep this in mind when deciding whether or not to provide your TFN to your bank.

Tax tips for term deposits

Want to minimise the tax you have to pay on term deposit interest? Keep the following tips in mind:

  • Plan your interest payments. Consider your likely tax liability for the financial year ahead. If you’re planning on having a term deposit mature in that year, will the interest payments you receive move you into a higher tax bracket? By structuring your term deposit interest payments carefully, you can reduce the risk of being stuck with a hefty tax bill in any given year.
  • Structure your term deposits. If you earn more income than your partner and you’re likely to face a sizable tax bill, you might want to consider structuring new term deposits so that they’re held in your partner’s name or perhaps owned jointly.

With careful planning and an eye to the future, you can make sure you always meet your obligations to the ATO, and hopefully ensure that you’re never stuck with a tax bill you can’t afford.

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