When you earn interest on a term deposit, it's important to remember that this income is taxable. The Australian Tax Office (ATO) considers that interest earned on term deposits forms part of your taxable income. This means the interest you realise on your term deposit may be impacted by your marginal tax rate.
This article contains information that is general in nature and is not financial, taxation or other advice. It’s simply a resource to help you understand that term deposit interest is taxable.
How is term deposit interest taxed?
Interest earned on a term deposit is added to your other sources of income and taxed at your marginal tax rate. So, if you’re in a higher tax bracket, for example, the interest you earn will be taxed at a higher rate.
When should you declare the interest?
The length of your term deposit and how the interest is paid can impact when you need to pay tax. For example, for short-term deposits (e.g. term deposits of less than 12 months), interest is typically paid at the end of the term and taxed in relation to the financial year in which the accrued interest is received.
In comparison, for long-term deposits (12 months or more), if interest accrues in a financial year, this interest may need to be declared. You should discuss when you need to declare the interest with an independent taxation advisor.
Authorised deposit-taking institutions (ADIs) are required to report any interest paid to you directly to the ATO. The ATO cross-references this information with your tax return, so it’s important to declare the correct amount to avoid any issues or penalties.
Whether you withdraw the interest or roll it over into a new term deposit is not relevant to determining whether you need to declare interest to the ATO.
A note on Tax File Number (TFN) or exemption
When you open a term deposit, your ADI will request your TFN or relevant exemption code. While it’s not compulsory to provide your TFN, not doing so may lead to tax being withheld at the highest marginal rate plus applicable Commonwealth tax levies, including the Medicare Levy.
FAQs
Do you need to add your term deposit interest to your taxes yourself?
Your ADI reports the interest paid on your term deposit to the Australian Tax Office (ATO). If you provided your TFN to your term deposit provider, this interest paid should be pre-filled when you file your taxes online. However, you should check that the information is correct and that this is the appropriate amount of interest to be included in your tax return. You should seek independent tax advice if you are unsure. If something is missing or wrong, you can manually update it.
What happens if I don't provide my TFN when opening a term deposit?
Again, while it’s not compulsory to provide your ADI with your TFN, if you don’t provide it, the term deposit provider is required to withhold tax on your interest at the highest marginal rate plus applicable Commonwealth tax levies, including the Medicare Levy. This could be more than your normal tax rate. The withheld tax is sent to the ATO by the ADI, and you can seek to claim it back later.
Important Information
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