Income tax
Interest income
Interest income is the amount earned from lending money or holding it in accounts such as savings and term deposits, and it is assessable income in the year it is received or credited.
Interest income is the return you earn from money held in bank accounts, term deposits, bonds and similar arrangements, or lent to others. It is assessable income, and you must include it in your tax return, taxed at your marginal rate. Even small amounts of interest must be declared, although the ATO normally receives data from banks and pre-fills the figures.
Generally, interest is assessable when it is credited to your account, or when it is otherwise made available to you. For term deposits that pay interest at maturity, the timing may depend on your circumstances, and the rules can differ for certain financial arrangements. Ask the institution for statements showing the interest earned and the tax withheld for each year.
If you did not provide your tax file number to a bank or other financial institution, it must withhold tax from your interest at the top marginal rate plus the Medicare levy. Providing your TFN avoids this. You can claim the withheld amount as a credit in your tax return. Children and joint account holders should make sure the right person's TFN is recorded for each account.
Joint accounts need attention. Interest is generally split in proportion to each owner's legal interest, which is typically equal unless the account is held differently. Each owner reports their share. A common mistake is for one person to declare all of the interest, or for interest on an account held for a child to be treated as the parent's. Special rules apply to certain income of minors.
For businesses, interest earned on business bank accounts is assessable income of the business and is not a supply for GST, because financial supplies are input-taxed. This means no GST is charged on interest you earn, and GST credits cannot be claimed on costs that directly relate to earning it. Interest you pay on business loans may be deductible but is also generally not subject to GST.
Foreign residents may be subject to interest withholding tax, which is generally a final tax. Keep your bank statements and year-end summaries for five years. This is general information only, so confirm how interest is taxed in your case with the ATO or a registered tax professional.
Worked example
Fiona has a savings account that earns $450 in interest in the year and a term deposit that earns $1,200, a total of $1,650. She includes $1,650 in her assessable income. If her marginal rate is 30%, the extra tax is about $1,650 x 30% = $495. Her bank charges no GST on the interest, because financial supplies are input-taxed.
Practical tips
- Give your TFN to every bank and financial institution to avoid tax being withheld at the top rate.
- Split joint account interest according to each owner's share, and report only your share.
- Remember interest earned is not subject to GST, since financial supplies are input-taxed.