If you earn money from work or your investments, you’re probably familiar with filing an r income tax return at the end of each financial year.
It’s important to remember any interest earned on your savings in the previous financial year also needs to be declared and you may have to pay tax on it - depending on how much it is. This becomes much easier if you’ve provided your Tax File Number to your bank.e If you haven't provided the number, the bank may deduct withholding tax on your savings account.
What is withholding tax?
You have the option of providing your bank with your TFN at the time of opening a savings account, but it’s not compulsory to do so. However, if you haven’t given your bank your TFN, withholding tax could apply to the interest that you earn on your account. This means that the bank must withhold a certain amount from the interest that you earn annually and transfer it to the Australian Taxation Office (ATO).
Withholding tax on a savings account is calculated at the top marginal tax rate of 45 per cent with the additional Medicare levy of 1.5 per cent. Withholding tax applies to non-residents of Australia as well, and for them, the withholding tax rate is 10 per cent. Withholding tax comes into effect if your savings account earns more than $120 per year for an adult ($420 for children) during one financial year.
You can avoid withholding tax simply by providing your TFN when you apply for a savings account or sharing it with them any time before tax season.
What interest attracts taxes?
The ATO’s investment income rules state that all Australian residents have to declare any interest they receive.
Interest is considered income as it is money earned, just as you would earn a salary. And just as you would pay tax on your salary, you are required to pay tax on interest earned throughout the financial year.
Here’s are a few examples of the money that you need to declare in your tax return:
- Interest earned from savings accounts and deposits with banks, building societies, and credit unions
- Interest paid to you by the ATO
- Interest from a children’s savings account opened or operated by you
- Interest earned from foreign sources (tax offsets could be available)
- Money earned from selling investments, such as shares, etc.
- Life insurance bonuses (tax offsets could be available).
How can you declare any interest earned?
All interest that you earn can be declared on your annual income tax return. Banks and other financial organisations are also obligated to report details of the interest they pay to their investors and account holders to the ATO.
The ATO is then tasked with matching the investment income that you’ve reported with the amount reported by your bank. If any inconsistencies are found, your tax return will be recalculated, and fines could apply.
You don’t need to pay tax on the amount that is deposited into your account by your employer as that amount has already been taxed. It is only the interest that you earn on that money that may be taxed.
Why do I need to declare interest earned on a children’s savings account?
Many Australian taxpayers may be confused about the income tax requirements for a child’s savings account. If a parent or grandparent deposits funds into the child’s account, the interest earned from the account must be declared in their tax return.
However, the funds deposited in the account could be the child’s own money – say, birthday or Christmas presents, their pocket money or money earned from a part-time job. If the money in the account is used only by the child, then the interest earned is the child’s income.
If the child has no other source of income other than this interest, and it comes to less than $420 for the financial year, the child is not required to file an income tax return. However, if the child is under 16 and the interest earned exceeds $420, they will need to lodge a tax return.
How is interest earned calculated in a joint account?
Joint account holders are usually equal owners of an account and are required to pay equal tax. For instance, if you hold a joint savings account with your spouse, the interest is divided equally between the two account holders.
At the time of filing your tax returns, each account holder needs to declare just their share of the interest earned on the joint savings account, which is then added to their taxable income.
If the ownership is not shared equally, then ATO will require documentation to support that. The document should mention the source and split of assets, as well as who uses the funds in the account the most and the interest earned.