How and when do you pay tax on term deposit interest?

Earning interest on your savings is attractive, but it comes with tax obligations. If you're considering a term deposit, it's important to understand how the interest you'll earn is affected by tax. Let's explore what you need to know about paying tax on term deposit interest.

A term deposit is one of the most straightforward and secure ways to invest your savings. You simply invest your money for a set period and allow the interest to accumulate. With fixed interest rates, term deposits offer predictable returns even if the Reserve Bank of Australia (RBA) adjusts the cash rate during your investment term.

Yes. Just as with savings accounts, the interest earned on a term deposit is treated as income by the Australian Taxation Office (ATO). The amount is combined with other assessable sources of income - such as employment income, superannuation payments, and earnings from investments - and are taxed accordingly.

The timing of your interest declaration depends on how frequently you receive interest payments:

1. If interest is paid out at maturity, you'll declare it in the financial year when your term deposit matures. This applies even if your investment spans multiple years.
2. If interest is credited to your account periodically (e.g. monthly), you must declare it in the financial year you receive each payment. This may result in declaring interest across multiple financial years for a single term deposit.

For term deposits with multiple account holders, the ATO assumes equal ownership unless proven otherwise. Each account holder is responsible for declaring their portion of the interest earned.

For example, if you and your spouse jointly hold a term deposit that earns $500 in interest in a financial year, you would each declare $250 on your respective tax returns. If the ownership split isn't equal, you'll need to provide documentation to support a different allocation.

Many banks offer automatic reinvestment when your term deposit matures. If you choose to roll over your term deposit, including the earned interest, you still need to declare that interest at the rollover date. The reinvested interest becomes part of your new principal amount.

When opening a term deposit, your bank will request your Tax File Number (TFN). While not mandatory, providing your TFN is highly recommended. If you don't supply a valid TFN (or TFN Exemption), your bank must withhold tax from your interest earnings at the highest marginal tax rate. You can claim this withheld amount when you lodge your tax return, but it's more convenient to provide your TFN upfront.

Financial institutions report interest payments to the ATO, which cross-references this information with individual tax returns. Discrepancies are likely to be detected quickly and may result in adjustments to your tax assessment or penalties.

If you inadvertently omit interest from your tax return, the ATO may notify you of the mistake. They'll provide a deadline for submitting the correct information and issue an amended assessment. It's crucial to respond promptly to avoid further complications.

Finding the right term deposit

If you're ready to explore term deposit options, consider reviewing our term deposit interest rates comparison page. For a curated selection of top performers, you might also check out the Mozo Experts Choice Award Term Deposit winners. These resources can help you find a term deposit that aligns with your financial goals while ensuring you're prepared for the associated tax responsibilities.