How do you pay tax on term deposits?

Just like your regular income, the interest you earn on term deposits is taxable. You should pay tax on any interest that you have received within the current financial year. For example, if you receive monthly interest payments, these payments should be claimed on your tax return. However, if your term deposit is longer than one year and you will only receive interest at maturity, then you will pay tax on your interest in the year that you receive it. 

How is term deposit interest taxed?

Paying tax on your interest is much like paying tax on your other income. The money you have made in interest should be added to your income from your job and any other sources to find your total taxable income for the financial year. Other factors such as deductions and salary sacrifices could affect your final tax return from the Australian Taxation Office (ATO).

How does tax work for joint term deposits?

If you co-hold a term deposit with family or friends, the ATO assumes that any interest earned on the deposit will be split equally between you. For example, if you opened a joint term deposit along with your mother, father and sibling, each of you will include 25% of the interest earned that financial year on your income taxes.

If ownership of a joint term deposit is not split evenly, you’ll need to provide the ATO with documentation that demonstrates how the interest income is divided.

What happens if my interest income is rolled over?

Several deposits offer automatic rollovers, where when your term deposit reaches maturity, the deposit and any interest earned on it are automatically deposited again for another term. This can be handy for growing your wealth by earning interest over the long run.

Even if your term deposit automatically rolls over, the ATO will still want to know about any interest it earns in the financial year that it reaches maturity. The interest earned is still income, even if it’s invested straight back into the term deposit.

Do you need to add your term deposit interest to your taxes yourself?

You may not need to add your interest income to your taxes yourself each financial year. If you provided your Tax File Number (TFN) to your bank or Authorised Deposit-taking Institution (ADI) when you first opened the term deposit, the bank or ADI should be able to send the relevant details directly to the ATO on your behalf. If you do your taxes online, the interest income should then be pre-filled. It's still important to double-check the details of your term deposit interest to make sure there are no mistakes that could affect your tax returns, now or in the future.

If you don’t provide your TFN to your bank, the bank will deduct withholding tax from the interest you earn and send it straight to the ATO. The tax rate charged may be much higher than your correct tax rate, so you may not get this money back until you complete your tax return and get a refund.

As Australian tax rules can change regularly, it may be worth contacting a tax accountant for more personal advice on how the savings in a term deposit may affect your taxes.

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