Do I have to pay taxes on the interest earned in my savings account?

Do I have to pay taxes on the interest earned in my savings account?

The interest you earn on your savings account is one of several investment income sources, like the dividend on stocks or the rent from a property. When it comes to your tax return, you need to include all income you receive. This should include interest from savings accounts or term deposits, as the Australian Taxation Office (ATO) will include it when assessing the tax you’re required to pay.

You’d need to pay tax on the total of all your earnings at a rate determined by the tax bracket that applies to you based on your total taxable income. Usually, the interest you earn more than compensates for the tax that it attracts.

How much tax is paid on savings account interest?

Your tax liability for the interest earned through a savings account can depend on whether you alone are operating the account for yourself. For instance, if you and your spouse have a joint savings account and you both put in and take out money from it, the interest earned would be equally split between the two of you. Each of you would then need to declare half the interest amount along with other taxable income. You’d then have to pay tax on the total income per the ATO’s tax rates. 

Below is a summary of the current tax rates for Australian residents:

  1. If you earn up to $18,200, you are not liable to pay any tax. 
  2. If you earn between $18,201 – $45,000, you have to pay a tax of 19 cents per every dollar you earn over $18,200. 
  3. If you earn between $45,001 – $120,000, you have to pay a flat tax of $5,092 in addition to 32.5 cents per every dollar you earn over $45,000.
  4. If you earn between $120,001 – $180,000, you have to pay a flat tax of $29,467 in addition to 37 cents per every dollar you earn over $120,000.
  5. If you earn more than $180,000, you have to pay a flat tax of $51,667 in addition to 45 cents per every dollar you earn over $180,000.

These tax rates can also be revised from time to time - you should check the ATO website for the latest rates or talk to a tax accountant. 

If you’re operating the savings account on behalf of a child, the tax rate can vary further. In this case, the account may be taxed at a higher rate if the child’s date of birth or tax file number (TFN) is not on file and the account is used to receive cash gifts but not for other transactions. Suppose an adult operates the account on behalf of a child, depositing money they’ve earned and withdrawing money for the child’s expenses. In that case, the interest earned is considered the adult’s income and taxed with the rest of their earnings. 

How can I find out if I have to pay taxes on interest from my savings account?

Your bank or financial institution will provide you periodic statements listing the transactions on your savings account via internet banking, via email or in the post. These statements will mention the interest you’ve earned on any funds in your savings account. You can also ask your bank for an end of financial year statement showing the interest you’ve earned in that financial year before filing your tax return.

This will be different from a standard statement as it will be for the full financial year from July to June. The bank has to send a statement mentioning the interest earned on your savings account to the ATO. Your bank may withhold tax on the interest you earn if you’ve not provided them with your TFN. This will appear on your statement as either 'TFN withholding tax' or 'Commonwealth tax'.

Once you file your tax return, the ATO will check the amount you’ve mentioned against the amount reported by your bank. In case there is any difference between the two, they’ll ask you to explain the difference and revise your tax return if necessary. For this reason, you should keep a copy of the bank documents you referred to when calculating your interest income along with your payslips and other financial statements.

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Learn more about savings accounts

Do I have to claim interest on my savings account?

When you lodge your income tax returns, you must include in the documentation all your sources of income, including bank interest. Your bank will report any interest you earn on the funds in your savings account to the Australian Tax Office (ATO). When the ATO then compares this information with your tax returns,  you also need to have mentioned the interest earned. If there is any discrepancy, you’ll receive a letter from the ATO. 

Avoid this situation by ensuring you receive your bank statement with interest noted. Then declare the interest in your tax returns and pay the tax that’s applicable based on the income tax rate.

You only need to claim your share of the interest earned for joint accounts. If you manage an account for your child and receive or spend money via this account, you will also need to report any interest earned from said account.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

What is an ANZ locked savings account?

An ANZ locked savings account locks your money and prevents you from spending. You may use a standard savings account as the account where your salary is deposited. You can then withdraw funds when needed, but aren’t able to make purchases with it. However, this account may not grow much as the continual withdrawing of funds will limit the interest you can earn.

With a locked savings account in ANZ, you know your savings will grow because you can’t access the money. You can also qualify for a bonus when you deposit at least $10 per month and don’t make any withdrawals. To help you with this further you can set up an automatic transfer from your regular ANZ savings or transaction account so you don’t forget to make a monthly deposit.

Your ANZ locked savings account offers you a base interest rate of 0.1 per cent per annum plus an additional bonus interest of 0.49 per cent per year. The interest is calculated daily and credited to your account on the last working day of the month.

What are the requirements of an ING Bank locked savings account?

An ING bank locked savings account - also called a term deposit - offers you interest in exchange for holding your money for a period of time.

The terms offered include as little as 90 days or as long as two years. Generally, the longer you lock your money away, the higher the rate of interest. 

The minimum deposit amount for an ING locked savings account is $10,000. 

To be eligible to apply, you must: 

  • Be an Australian resident for tax purposes
  • Be aged 13 years or older
  • Hold the account for personal use (ING offers business term deposits as a separate product).