How Interest Income Is Taxed in Australia

Interest income from savings accounts, term deposits, bonds, and other cash investments is treated as ordinary assessable income in Australia. This means it's added to your other income — your salary, business income, dividends, and any other earnings — and taxed at your marginal rate. Unlike dividends from Australian companies, there are no franking credits or special tax treatments for interest income. The full amount of interest you earn is simply added to your taxable income.

The ATO requires banks, credit unions, and other financial institutions to report interest payments made to you each financial year. You should receive an annual interest summary from each institution where you hold accounts earning over a small amount (typically $1 or more). If you don't receive a statement, you're still required to report the interest you've earned. The ATO cross-checks bank-reported data against your tax return, so under-reporting interest income is easily detected and can result in penalties.

For FY 2025-26, the tax treatment of interest income is straightforward: your total interest earnings for the year are added to your other income, and tax is calculated on the total using the current tax brackets. The standard thresholds with the Stage 3 tax cuts remain in effect, including the 16% rate for income between $18,201 and $45,000, and the 30% bracket from $45,001 to $135,000.

Tax Rates for Interest Income in FY 2025-26

Your interest income is taxed at the same progressive rates as your other earnings. The table below shows the full tax brackets for FY 2025-26, which you can use to estimate the tax on your interest income. Simply add your total interest to your other income and find the bracket that applies to your total taxable income.

This table shows that $5,000 in interest income costs between $800 and $2,350 in combined tax and Medicare levy, depending on your marginal rate. The higher your total taxable income, the more tax you pay on your interest earnings. This is why the effective return on cash investments is lower for high-income earners — a 5% savings account rate equates to only 2.75% after-tax for someone in the top bracket with Medicare.

Types of Accounts and Their Tax Treatment

Different types of savings and investment accounts all receive the same tax treatment — the interest is assessable income — but they differ in when and how interest is paid. Standard savings accounts typically credit interest monthly or quarterly, and you declare the total earned during the financial year. Term deposits usually pay interest at maturity, which could be in a different financial year than when you opened the deposit, so timing matters for your tax return.

High-interest savings accounts (HISAs) and bonus saver accounts work the same way. The bonus interest is not treated differently from the base rate interest — it's all assessable income. Some banks offer introductory bonus rates for the first few months, but the full amount earned is taxable. Online savings accounts and offset accounts have different treatments: an offset account linked to your home loan doesn't earn taxable interest; instead, it reduces the interest charged on your loan, which is not taxable but also not deductible.

Other interest-bearing investments like government bonds, corporate bonds, and debentures also generate taxable interest income. Even interest earned on tax refunds paid late by the ATO is assessable income. The key principle is that any money you earn from lending out your cash — whether through a bank account, bond, or peer-to-peer lending platform — is taxable in Australia.

How Interest Income Affects Your Tax Position

Interest income doesn't just add to your tax bill directly — it also affects other aspects of your tax situation. Your total taxable income, including interest, determines whether you need to pay the Medicare levy. In FY 2025-26, the Medicare levy of 2% applies once your taxable income exceeds approximately $27,222, with a shading-in range from $23,226 to $27,222. If interest income pushes you over these thresholds, you may also become liable for the Medicare levy for the first time.

If you have a HECS-HELP debt, interest income counts toward your repayment income. This means if you're near the $67,000 repayment threshold for FY 2025-26, even modest interest earnings can trigger HECS repayments. The repayment rate ranges from 1% to 10% of your total income, depending on your repayment bracket. For someone earning $65,000 in salary with $3,000 in interest, the interest pushes them over the threshold and triggers a HECS repayment obligation.

Interest income also affects your eligibility for certain tax offsets. The Low Income Tax Offset (LITO) phases out at a rate of 6.5 cents per dollar for taxable income over $37,500, reaching zero at $66,667. If your interest earnings push you further into the phase-out range, you'll lose some or all of your LITO entitlement. Similarly, if you're eligible for the Senior and Pensioners Tax Offset (SAPTO), additional interest income could reduce this benefit.

Strategies to Minimise Tax on Interest Income

While interest income is fully taxable, there are legitimate strategies to reduce your tax burden. One option is investing through a superannuation fund. Inside super, your investment earnings — including interest — are taxed at just 15%, compared with your marginal rate which could be up to 47% (including Medicare). However, super contributions are locked away until preservation age, so this strategy works best for long-term savings.

Another approach is distributing interest-bearing assets among family members. If you have a spouse or adult children with lower marginal tax rates, holding savings accounts in their names can reduce the overall family tax bill. However, be careful with minor children (under 18) who are subject to penalty tax rates on unearned income above $416 — effectively 66% for income over $1,307. Minor income rules apply strictly, so transferring accounts to children for tax avoidance purposes is not effective.

For those with significant savings, consider whether salary sacrificing to super could help. By reducing your employment income through salary sacrifice, you lower your marginal tax rate, which in turn reduces the tax you pay on your interest income. For example, if you're earning $80,000 and salary sacrifice $10,000 to super, your taxable income drops to $70,000, still in the 30% bracket but with more room before hitting the threshold. Use our take-home pay calculator to model different scenarios and see how interest income affects your overall position.

Reporting Interest on Your Tax Return

Reporting interest income on your tax return is straightforward. Most people use myTax, the ATO's free online lodgment system, which now pre-fills interest information from most Australian banks and financial institutions. You simply review the pre-filled data, add any missing amounts from banks not covered, and file. If you lodge through a registered tax agent, they'll have access to the same pre-fill data and can help ensure nothing is missed.

You need to report interest from all sources separately — from each bank account, term deposit, bond, and any other interest-bearing investment. Joint accounts are split 50-50 between account holders (or according to your ownership share). If you earn interest from foreign bank accounts, this must also be declared and may require additional foreign income reporting. The ATO receives international banking information through automatic exchange agreements, so foreign interest income is increasingly difficult to hide.

One common mistake is forgetting to declare interest earned on accounts that have very low balances or that you've forgotten about. Even $1 of interest is reportable, and the ATO's data matching systems often catch these small amounts. If you discover you've missed reporting interest in a previous year, you can lodge an amended return rather than waiting for the ATO to contact you — voluntary disclosure attracts significantly lower penalties than an ATO-initiated audit.

Frequently Asked Questions

Is interest from savings accounts taxed differently from term deposit interest?

No. All interest income in Australia receives the same tax treatment regardless of the account type. Whether it's a standard savings account, a bonus saver, a term deposit, or a bond, all interest is added to your assessable income and taxed at your marginal rate.

Do I have to pay tax on interest if I'm below the tax-free threshold?

The $18,200 tax-free threshold applies to your total taxable income, including interest. If your total income (salary plus interest plus all other income) is below $18,200, you pay no income tax. However, if interest pushes your total income above $18,200, the entire amount above the threshold is taxed at 16% plus the Medicare levy where applicable.

Does the ATO automatically receive my bank interest information?

Yes, most Australian banks and financial institutions report interest paid to the ATO each year. This data is used for pre-filling tax returns and cross-checking against what you declare. However, you remain responsible for reporting all interest, even if it doesn't appear in pre-fill data. Foreign bank accounts may not pre-fill, so you need to declare these manually.

Can I claim deductions against my interest income?

Yes, you can claim expenses directly incurred in earning interest income. This includes account keeping fees for accounts that don't charge them on your loan offset, and costs related to managing your investments. If you borrow money to invest in interest-bearing assets, the interest on that loan is also deductible (subject to sufficient connection to earning income).

How is joint account interest reported?

Interest from a joint account is generally split equally between account holders. However, if you hold the account in different proportions — for example, 60/40 — you can declare according to your beneficial ownership. The bank typically reports interest under the primary account holder's tax file number (TFN), so it's important that both parties declare their share correctly to avoid ATO query letters.