Is a term deposit an asset?

A term deposit is a savings account with a fixed term and a fixed interest rate. Typically, you agree to lock your money away with an Authorised Deposit-taking Institution (ADI) for a specific period, which can range from a few months to several years. In return, you’ll receive a guaranteed interest rate that's often higher than a regular savings account.

Before determining whether a term deposit qualifies as an asset, let's clarify what an asset is. In simple terms, an asset is something of value that you own. Assets can be tangible, like a house or a car, or intangible, like stocks and bonds. They contribute to your overall financial worth and can be used to generate income or provide you with some form of value.

Assets are typically categorised into two main types: current assets and non-current assets. Current assets are those that are expected to be converted into cash within a year, such as money in your bank account. Non-current assets, on the other hand, are less liquid and are intended to provide long-term value, like real estate or other ongoing investments.

Is a term deposit an asset?

In short, yes, it is. A term deposit falls under the category of a financial asset, specifically a cash and cash equivalent asset. It's a form of investment that you own, and it holds monetary value.

Can a term deposit be used as collateral for a loan?

Given that it’s considered an asset, you may wonder if you can use your term deposit as collateral for a loan. This is known as a secured loan, where your term deposit serves as security for the lender. It's an option that can provide you with access to funds while keeping your term deposit intact. However, it's essential to understand the terms and conditions of such arrangements and the potential risks involved.

Term deposits are often preferred by lenders as collateral because they are considered low-risk investments. The amount you can borrow is often linked to the value of your term deposit.

Using your term deposit as collateral for a loan is not limited to one specific type of loan. You can explore various secured loan options, including home loans, personal loans and car loans.

Where do you put a term deposit on a balance sheet?

If you were to create a balance sheet, which is a financial statement that provides a snapshot of your assets, liabilities, and equity at a specific point in time, your term deposit would be classified as a current asset. It's considered current because you can access the funds within a relatively short time frame, usually once the term matures.

Your term deposit would be listed under "cash and cash equivalents" alongside other liquid assets like your regular savings account and cash on hand. It's important to note that while a term deposit is indeed an asset, it's not as readily available as the cash in your wallet. You'll need to wait until the maturity date to access your funds without penalty.

It's important to be aware of the tax implications associated with term deposits. In Australia, the interest income earned from a term deposit is generally considered taxable income. This means you'll need to declare the interest you earn on your annual tax return. The amount of tax you pay will depend on your overall income and tax bracket.

Additionally, if you have multiple term deposits with different maturity dates, you may need to keep track of the interest income from each deposit separately for tax reporting purposes.

However, in most cases, the Australian Taxation Office (ATO) automatically pre-fills your taxable income. When you lodge a tax return using the ATO’s online services it sources information about you. This information comes from your Tax File Number (TFN) and third parties, including employers and other government agencies. This means there are less questions you need to answer and the result is tailored to you.

If your financial situation changes or any of the information is incorrect, you’ll need to inform the ATO and make any necessary updates so your taxable income is accurate.