- Interest Earned is Taxable – Any interest earned on savings accounts is considered assessable income and must be reported to the ATO, regardless of the amount.
- Impact of Not Providing a TFN – If a taxpayer does not supply their Tax File Number (TFN), their bank must withhold tax at the highest rate (45%) plus the Medicare Levy (2%) on interest earned.
- Benefits of Supplying a TFN – Providing a TFN ensures that tax on interest income is applied at the individual's marginal tax rate and deferred until the end of the financial year, allowing for better cash flow and compounding interest benefits.
- Exemptions and Special Cases – Certain individuals, including minors under 16 earning less than $420 in interest and specific non-profit organisations, may be exempt from providing a TFN and facing withholding tax. In these cases you might need to supply a TFN exemption form.
The reason is because that if you earn interest then that interest becomes part of your assessable income. Of course, you may just have a transaction account that gives you a few dollars each year with a very low interest rate, but even so, it all has to be reported to the ATO each year.
Anyone over 16 who has earned more than $120 interest through the year will have tax withheld if they haven't supplied their ABN, TFN or TFN exemption.
If you neglect to share your TFN or your exemption certificate, it means that your bank or ADI will have to deduct Withholding Tax at the highest rate (45%). It'll also apply the Medicare Levy (minimum 2%) on any accounts that haven't supplied a TFN or the exemption.
This is as opposed to at your maximum marginal rate and at the end of the year (rather than with every payslip).
No TFN vs Supplying TFN
Say you earned $70,000 in employment income and $2,000 in savings interest. That puts you in the 30% marginal tax bracket (plus 2% for Medicare). On that $2,000 you'd owe $640 at the end of the financial year if you supplied your TFN.
If you didn't supply your TFN you'd pay the equivalent of $940 - that's withdrawn throughout the year, and you'd need to wait until the end of financial year to get your $300 back.
That doesn't seem like much, but the differences become greater should you be in a lower marginal income tax bracket, earn more in interest, or face the Medicare Levy Surcharge. Yes you'll get it back, but you'll need to wait.
See Also: Income Tax Calculator
Benefits of Supplying a TFN
The main overarching benefit of supplying a TFN is that it shifts the tax burden from every pay cycle to once at the end of financial year. This can present a few interesting and potentially beneficial scenarios.
Compounding Interest
Having extra money in your account through the financial year means more interest that compounds. Compounding basically means interest that earns interest.
You can calculate the difference using our savings calculator.
Cashflow
By not having money taken out as tax withholding every pay cycle (whether that's weekly, fortnightly, or monthly), that frees up the cash to be used for other things. For example, you might be able to keep saving it, or use the interest to pay for household expenses.
Shifts the Tax Burden
Having a tax bill at the end of the year is technically more prudent than having tax withheld every pay cycle because of the aforementioned reasons. If you think of it like a free loan from the government for the financial year, it's better in your pocket than theirs.
Reduce the Tax Burden to Zero
As the end of financial year passes you'll get a clearer idea of the ledger that needs to be settled between yourself and the ATO. If you have a tax bill from savings interest, you might be able to reduce it even down to zero through your deductions.
For example, if you drive a lot for work, have a uniform that needs to be laundered, buy office equipment to work from home or make other deductions, you might see that balance reduce to nothing. Just remember to keep your receipts and document everything through the year. If in doubt, speak to a tax accountant.
When Not Supplying a TFN Makes Some Sense
There are some scenarios where not supplying a TFN on interest-bearing accounts could make sense, and they're mainly psychological.
Taxed 45% anyway
If your income is in the highest tax bracket, and you don't supply a TFN, the tax burden is the same at 45% - plus the 2% Medicare levy and any surcharges if you don't have private health insurance.
However if you don't supply a TFN the tax withholding is applied every pay cycle versus at the end of the year.
Don't want to face a tax bill
If you earn a lot of interest via savings accounts every year, it's feasible you'll face a tax bill. If you didn't plan on this through the year, this could be a nasty surprise.
While the ATO does allow you to pay this off in instalments, it can still be a pain in the backside. If the ATO forecasts that you'll face a tax bill over a certain amount, it might present the opportunity to pay this off every quarter - the choice is yours.
Don't trust yourself with savings interest
If you don't like having extra money through the year to play with, you can always let the tax man hold onto it for you. However the end result is that you might get some cash back after your next tax return, which could easily be blown on clothes or a TV.
Tax File Number (TFN) - Frequently Asked Questions
What is a TFN?
Your tax file number, or TFN, is unique to you and you use it as your personal reference number for all your tax and superannuation functions and purposes. You also need it if you're in receipt of any government benefits, when you're filing your annual tax return and also when you're applying for an Australian Business Number (ABN).
This number stays with you for life, no matter how you change throughout your life - marriage, name changes, identifying as a blue-ringed octopus or just switching jobs - your TFN stays constant.
Where can I find my TFN?
It's important to keep track of your TFN and keep it secure somewhere, because you'll always need it for something and the chances are your mind will go blank.
If you're like most people and can't remember a random assortment of digits you seldom use, then you can find it on an income tax notice of assessment from the ATO. It's displayed on the top right-hand corner of this document. You'll also find it on your payslips and super statements.
If you have an ATO account via MyGov you can also find it there.
Do I need to keep my TFN secure?
This number is very important so you need to make sure it's never found out by the wrong person, who could go on to use it for several kinds of fraud, including identity theft. You shouldn't store it in your mobile phone, on a scrap of paper in your wallet or scribbled down on your family planner that's clearly visible in your hallway.
It's also a bad idea to send your TFN to someone in an email or text message. Even when you're starting out with a new employer, you should supply them with your TFN by filling out a paper declaration form. It might feel a little last-century, but it's safer.
Who is exempt from supplying a TFN?
Some individuals and organisations can claim TFN exemptions. These categories include pensioners, account holders who are under 16 years of age and various non-profit organisations. You can check with the ATO to see if you or your organisation is eligible for an exemption.
Joint account holders need to supply their TFNs individually. Even if there's a "primary" account holder or contact person, both parties need to submit their TFNs in order to receive the interest earned in any financial year.
In short, any interest earned on your bank accounts can be subject to withholding tax if you don't supply your ABN, your TFN or your TFN exemption to your bank. You don't have to give the bank these details but remember that the institution is required by law to withhold the money.
How are minors taxed on savings interest?
If you're under 16 then you'll be able to earn up to $420 in interest in any one financial year before you're subject to withholding in the absence of a TFN. If the account is held by a parent or guardian, then this person may supply their TFN. If the account is part of a formal trust then the TFN for the trust can be supplied to the bank instead.
Is there a minimum amount of interest that is subject to withholding?
Yes. If you're over 16 and you've earned more than $120 in interest in any one financial year then you'll face withholding tax if you don't give the bank your ABN, TFN or exemption.
Your bank is also required to withhold the tax if you're a non-resident.
How are non-residents taxed?
If you weren't a resident in Australia during any one financial year and you received any interest from an Australia-based bank account, you'll still have to pay tax on the interest at the non-resident withholding rates.
For non-residents, there is no tax-free threshold, and the rates are for the 2024-25 financial year:
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0 - $135,000: 30c for each $1
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$135,001 - $190,000: $40,500 plus 37c for each $1 over $135,000
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$190,001 and over: $60,850 plus 45c for each $1 over $190,000
It's important to report your residency status on your tax return each year and if you're uncertain about it, call the ATO for advice. If you've reported it incorrectly, don't worry, just let the ATO know and they can issue you with an amended notice of assessment.
Article first published in October 2021.
Image by Artem Beliaikin on Unsplash
