Tax on Interest Earned on Savings Accounts

Learn how much tax you have to pay on interest from your savings account right here with Savvy.

Last updated on June 24th, 2022 at 01:59 pm by Kurtis Eichler

Do I need to pay tax on the interest earned on my savings account?

If you’re putting money away in a savings account, chances are you’re earning a return on your investment. Depending on how much interest you accrue on your deposits, you may have to pay tax.

By comparing your savings options with Savvy, you can find an account which gives you the best after-tax return. Reading our detailed guide will make working out your taxable income simple and provide you with tips to get the most out of your money.

Do I have to declare interest earned on my savings at tax time?

The short answer is yes. One of the advantages of a savings account is the ability to earn interest on the money you put away. The interest you earn on your savings is viewed as income by the Australian Taxation Office (ATO) and must be declared on a tax return at the end of the financial year. You don’t need to declare your whole savings, just the interest you earned on it. All interest must be declared, even if the funds earning it were not subject to tax. How much tax, if any at all, you have to pay is determined by your gross income.

If you’re operating a child’s savings account for your son or daughter, you will still need to declare any interest you earn. It’s up to you as the parent or guardian to file a tax return on their behalf. Under tax office rules, however, you only need to pay tax if the amount of interest you earn annually eclipses $416.

Failing to declare interest earned from your savings accounts could land you in hot water with the tax office. The ATO receives a report from financial institutions detailing who interest is paid to and how much. You could face a penalty or a small tax return if this information doesn’t match what you supplied on your tax return.

How do I work out how much tax I have to pay?

The amount of tax you pay directly correlates to what income tax bracket you fall under. The more you earn from all your income sources, the more tax you’ll have to pay. These tax brackets include:

  • $0 to $18,200 – Tax-free
  • $18,201 to $45,000 – 19c for each $1 over $18,200
  • $45,001 to $120,000 – $5,092 plus 32.5c for each $1 over $45,000
  • $120,001 to $180,000 – $29,467 plus 37c for each $1 over $120,000
  • $180,001 or more – $51,667 plus 45c for each $1 over $180,000

Which variables can help me boost my after-tax savings?

Savings accounts come with several ever-changing variables. Picking an account with a strong mix of features can boost your balance and avoid your hard-earned money being eaten away by tax. Comparing these factors with Savvy will ensure you have more money left over after tax time.

High interest rate

A high interest rate facilitates faster savings growth, which is why it’s important to search the market for the best rate of return on your money. It won’t just fast-track achievement of your savings goals, but will also earn you more interest on your funds. For instance, depositing $1,000 every month into an account earning 0.5% p.a. will net you about $1,000 in interest over six years. However, if you invested at a rate of 1.5% p.a. instead, your interest earned would be just shy of $3,300.

Low fees

Typically, savings accounts don’t come with many fees. The main ones, such as $5 monthly account keeping charges, are usually waived upon meeting certain monthly requirements. However, it’s still important to weigh these up when you’re shopping around. Finding a fee-free account will avoid your interest being swallowed up by avoidable costs.

Limited access

Removing the temptation to tap into your savings can be the key to growing your balance. Term deposits lock your money away for a fixed period, with your funds unavailable until the date of maturity. Choosing to reinvest your funds into your account allows your interest to compound, boosting the interest you earn. Savvy’s handy compound interest calculator can simulate how much you could earn by leaving your money untouched.

Bonus interest

Institutions offer bonus high interest rates if you meet monthly account conditions, such as minimum deposit or balance requirements. These bonus rates are up to ten times higher than the base interest rate on these accounts and sometimes more. When shopping around for the best deal, ensure you pick an account with the most manageable set of conditions so you’ll be able to earn your bonus interest.

Setting a savings goal

Having a savings target to work towards can motivate you to put more money aside so you can reach it. Set yourself a goal and budget how much you can afford to put towards it each fortnight. You can even set up automatic transfers from the account your wages are paid into to streamline the process. To help with your budgeting, use Savvy’s income annualisation calculator to forecast your earnings and estimate how much you can put away over 12 months.

Frequently asked savings account questions

Can I open a tax-free savings account?

No – tax-free savings accounts aren’t available in Australia. All interest earned is seen as taxable income and must be declared on a tax return form. Your best bet at keeping more money in your account after tax time is to find a low-cost, high interest savings account.

I’ve inherited some money. Do I need to pay tax on it?

No – you won’t have to pay tax on the money you inherit. Australia’s inheritance tax was scrapped in 1979 following a similar law being revoked by the Queensland Government to attract interstate migration.

How is tax calculated on a joint savings account?

Unless they’re told otherwise, the ATO assumes account holders have equal responsibility for a joint account. If one person contributed more to the account, they can apply to pay a larger share of tax.

Do I have to pay tax if I’m on a temporary visa?

If you’re on a temporary visa or are a foreign resident, banks automatically withhold tax from any interest earned on your savings account. Your tax will be calculated at 10% if you’ve provided an overseas address and 47% if you don’t.

How is interest calculated on a savings account?

Institutions use a relatively simple process to calculate interest on your savings account. This includes:

  • Dividing the interest rate by the compounding frequency
  • Adding one to this divided rate
  • Multiplying it by the power of months you’re earning interest
  • Multiplying this amount by your account balance

 

If you want to simplify the process, though, you can use Savvy’s easy-to-use savings calculator to estimate your interest without the need to crunch the numbers yourself.