Tax-time tips for term deposits

It’s everyone’s favourite time of year: tax time. If term deposits are part of your financial basket, it's essential for you to understand the implications they may have on your taxable income. 

Term deposits are a popular choice for seniors due to their low risk and fixed interest rates. But, like other income, the interest you earn on these investments may be liable for tax.  

Here are some key points to help you navigate tax time with term deposits. 

Yes, the interest earned on term deposits is considered taxable income. 

Regardless of whether you withdraw the interest or roll it over into a new term deposit, you must report it to the Australian Taxation Office (ATO). 

The amount of tax you will pay on the interest earned from a term deposit depends on your marginal tax rate. 

The interest earned is added to your total assessable income for the year, so it depends on the tax bracket you are in. 

Check whether you have provided your tax file number (TFN) to your bank. It is not compulsory for you to do so but if you haven’t, the bank may withhold tax from your interest payments at the highest marginal tax rate. 

This could be much higher than the rate you normally pay. 

When filing your tax return, you need to declare all interest earned from your investments, including term deposits. This includes interest paid into your account and interest rolled over into a new term deposit. 

If you roll over the interest into a new term deposit, it is still considered earned and must be reported in the year it was credited to your account. 

The length of your term deposit and its interest structure can affect how and when you pay tax: 

• Short-term term deposits (for example, 12 months): Interest is typically paid at the end of the term and is taxable in that financial year. 
• Long-term term deposits (for example, 24 months): If interest is paid annually, you pay tax on the interest earned each year. If interest is only paid on maturity, you will declare the interest in the year the deposit matures. 

It's important to plan and understand how the maturity of your term deposit will affect your taxable income, especially if it coincides with other large income events. 

If you hold a joint term deposit, the interest earned is usually split equally between all account holders. 

Each holder must declare their share of the interest on their tax return. For example, if you and your partner earn $1,000 interest on a joint term deposit, each of you would declare $500 as taxable income. 

No, you do not pay capital gains tax (CGT) on term deposits. CGT applies to the sale of capital assets such as property or shares, not to the interest earned from savings accounts or term deposits. 

Here are some tips to make tax time simpler and ensure you accurately report your term deposit interest: 

• Good account keeping: Maintain clear and accurate records of your term deposits, including statements and interest earned. This helps ensure you declare the correct amount on your tax return. 

• Provide your TFN: While it isn’t compulsory to provide your tax file number (TFN) to your bank, the bank may withhold tax from your interest payments at the highest marginal tax rate if you do not supply it.   

• The account name: In a couple, consider whose name to put the term deposit under, as this could reduce your tax liabilities. For example, if one partner has a lower marginal tax rate, it might be beneficial for the term deposit to be in their name. However, be mindful of any legal or financial implications of this strategy. 

• Plan: Think about how the interest and maturity of your term deposit will affect you at tax time next year. Planning can help you avoid surprises and ensure you set aside enough money to cover any additional tax liability. 

By understanding these key points, you can navigate tax time more smoothly and ensure you meet your tax obligations regarding your term deposits. 

Related reading: MoneySmart, Finder