What is withholding tax on a savings account?

What is withholding tax on a savings account?

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.

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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.

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.

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.

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.

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 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

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.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

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 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.

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.

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.

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.

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.