Amplify your savings opportunity by knowing the Australian tax regulations for your interest earnings.
Australians are encouraged to save what they can through a large number of interest earning accounts offered by banks and other financial institutions. Yet, what many don’t realise is that those interest payments count as taxable earnings, which could result in you receiving less than what you had planned on.
What is investment income?
Any income that is derived from dividends, capital gains from the sale of an asset, or interest payments made to you is considered to be investment income. This includes any profit you make through an investment vehicle of any kind, including a savings account. Interest earnings are considered to be the profit gained from your savings investments, making them a taxable earning.
For most Australians, the majority of your income is earned through your employment. Investment income is typically gained by using a portion of your regular income to earn more money. When you put your money into a savings product that is earning interest, you are making an investment, no matter how small that amount may be.
Tax on children’s savings accounts
Children’s savings accounts are common ways for parents to invest in their child’s future. The interest that is earned on these accounts can also be taxable, depending on the circumstances. For example, if the account is commonly used by the parents or other signatory to pay expenses than the money is considered theirs, including the interest earnings. When the child is using the account only to guard their own funds, such as money earned for part-time work and gifts, then any interest earned is solely the child’s.
Tax is applied to the interest earned, even if the account is deemed the child’s, when that amount is more than $416. The tax rate on those earnings will depend on the amount of the earnings, but could be as high as 66%. Children who qualify for tax payments on their interest earnings will be required to lodge a tax return for that year, but if they are working or have certain disabilities they may be entitled to exemptions.
International tax for individuals
If you are an Australian resident or Australian resident for tax purposes, you are required to report and pay taxes on all income earned, including any money earned outside of the country. Temporary and foreign residents are only responsible for paying tax on the income they earn from working at an Australian based job. This makes it especially important for foreign residents to understand their residency status in order to be compliant with Australian tax law.
You are considered an Australian resident for tax purposes if you do not have a permanent home in another nation, are a foreign student enrolled in a class that is longer than six months, or you are visiting Australia for more than six months and have established ties in your local community. A foreign resident for tax purposes is one who is visiting the country for less than six months or visiting for more than six months but have not established a permanent home.
Why do I need to provide my TFN when opening a savings account?
For an Australian, your Tax File Number (TFN) is an imperative part of your tax and super records. It is a part of your identity, and will remain yours for life. This personal reference number is not mandatory to have, but without it you will pay more income tax.
When you apply for a savings account in Australia, it is also not mandatory to provide your TFN, but it could help to avoid having a withholding tax deducted from your interest earnings. Banks in Australia are obligated by law to withhold a certain amount from your interest earnings and send those funds to the tax office if you have not given them your TFN.
If you do provide your TFN, the bank will be able to report your earnings directly to the Australian Tax Office, (ATO), and will not need to deduct the tax from them. If you fill out your own tax forms online, you will find that the interest earnings field is already filled in, making the reporting of this income easier. Not only does providing your TFN allow the bank to pay you your full interest earnings, it helps with your reporting of income.