How Term Deposit Interest Is Taxed in Australia

In Australia, there is no special tax treatment for term deposit interest. The interest you earn is treated as ordinary assessable income, just like your salary, freelance earnings, or dividend payments. This means it is added to all your other income for the financial year, and you pay tax on the total amount according to the standard resident tax brackets.

Your bank or financial institution is required to report your interest earnings to the ATO each year. Most banks send you an annual statement or include the interest figure in your online banking portal, making it easy to find when you prepare your tax return. The ATO also receives this data directly from the bank, so it is important to report the correct amount.

The interest on a term deposit is typically paid either at maturity (for short-term deposits) or at regular intervals such as monthly, quarterly, or annually. Regardless of how often it is paid, you must declare the interest that accrues or is credited to your account during the financial year (1 July to 30 June).

FY 2025-26 Tax Rates Applied to Term Deposit Interest

The tax you pay on term deposit interest depends on your total taxable income, including all other sources such as employment income, investment returns, and business profits. The Stage 3 tax cuts remain in effect for FY 2025-26, with the 16% rate on the first bracket above the tax-free threshold and the 30% rate applying broadly to middle incomes.

As the table shows, the effective tax on term deposit interest varies dramatically depending on your overall income. A retiree with total income under $18,200 pays no tax on their interest at all, while a high-income earner in the 45% bracket effectively loses nearly half their interest to tax. Note that the Medicare levy (2%) also applies to most taxpayers, adding a further cost.

The Low Income Tax Offset (LITO) can reduce tax payable for those earning under $66,667. If your total taxable income (including interest) is below $45,000, you may receive a LITO of up to $700, which phases out by $5 for every dollar over $37,500. This can effectively reduce the tax on a portion of your interest income for low and middle earners.

Do You Need to Pay Tax on Term Deposit Interest If You Are Under the Tax-Free Threshold?

If your total taxable income, including all interest earned, remains below $18,200, you generally do not need to pay any income tax. However, you must still lodge a tax return if tax was withheld from your employment income, or if your bank has reported interest income to the ATO. Filing a return ensures the ATO has a complete record and may be necessary to receive any refunds of tax withheld.

If your income (excluding interest) is below $18,200 but adding the interest pushes you over the threshold, you will only pay tax on the amount above $18,200. For example, if you earn $16,000 in salary and $4,000 in term deposit interest, your total income is $20,000. You pay tax only on the $1,800 above the threshold, which is taxed at 16% ($288 plus the 2% Medicare levy).

How to Report Term Deposit Interest on Your Tax Return

Reporting term deposit interest is straightforward. Most tax returns — whether lodged through myGov, a tax agent, or using the ATO's myTax portal — will have a specific section for interest income. You simply enter the total gross interest earned across all accounts and term deposits during the financial year.

Your bank provides an annual statement showing the total interest paid during the year. If you hold multiple term deposits, you need to add up the interest from each one and report the combined total. The ATO's pre-fill system will often populate this information automatically from the bank's reports, but you should verify it is correct and add any missing amounts.

If you have a joint term deposit with your spouse, each person generally declares their share of the interest based on the account ownership. For a 50/50 joint account, each person reports half the interest earned. This is important to get right, as the ATO cross-checks joint account data against both tax file numbers.

Term Deposit Interest vs Savings Account Interest — Is There a Difference?

From a tax perspective, there is no difference between interest earned on a term deposit and interest earned on an ordinary savings account or a high-interest savings account. All interest income is treated identically: it is assessable income taxed at your marginal rate. The distinction between term deposits and savings accounts matters for your investment strategy (liquidity, interest rate, lock-in period) but not for how the ATO taxes the earnings.

However, there is one practical difference: term deposits typically pay interest at maturity or on a fixed schedule, which makes it easier to track the exact amount earned in a financial year. Savings account interest may be calculated daily and credited monthly, which can be slightly more complex to reconcile if you make frequent deposits or withdrawals. Most banks now provide clear annual summaries for both types of accounts.

Do Seniors and Pensioners Pay Less Tax on Term Deposit Interest?

Seniors and pensioners may qualify for the Senior and Pensioners Tax Offset (SAPTO), which effectively raises the tax-free threshold. For FY 2025-26, a single senior or pensioner can earn up to approximately $33,000 before paying income tax (depending on their rebate amount), and a couple combined can earn significantly more. This means many self-funded retirees can earn substantial interest income from term deposits without incurring a tax liability.

It is important to distinguish between tax treatment and Centrelink means testing. While term deposit interest is taxed at your marginal rate (which may be zero with SAPTO), the same interest is also counted under both the income test and assets test for the Age Pension. A large term deposit can reduce or eliminate the Age Pension even if no tax is payable. Use the Age Pension calculator to check how your term deposit balance affects your pension entitlement.

Strategies to Reduce Tax on Term Deposit Interest

While you cannot avoid tax on interest income entirely, there are legitimate strategies to minimise the impact. One common approach is to hold term deposits within your superannuation fund. Earnings inside super are taxed at a maximum of 15% (or 10% for capital gains on assets held longer than 12 months), which is significantly lower than most marginal tax rates. This is particularly effective for those in the 37% or 45% brackets.

Another option for low-income earners, including students and retirees, is to ensure your total income including interest stays within the tax-free threshold. Spreading term deposits between partners in a lower-income earner's name can also reduce the overall tax. However, be aware of the ATO's anti-avoidance provisions and ensure any income-splitting arrangement reflects genuine ownership.

For those approaching retirement, timing the maturity of term deposits can help manage tax. If you expect to have a lower income in a future financial year, you could select term deposits that mature after 1 July, when your income may be lower and the interest taxed at a reduced rate. Use the take-home pay calculator to model how additional interest income affects your overall tax position.

Frequently Asked Questions

Is term deposit interest taxed differently from other investment income?

No. Term deposit interest is taxed as ordinary income at your marginal tax rate, exactly the same as salary, business income, or rental income. It does not receive the 50% capital gains discount that applies to shares or property held longer than 12 months, and it does not benefit from franking credits like dividend income.

Do I need to pay tax on a term deposit held in a joint account?

Yes, but each account holder declares their share of the interest based on the ownership percentage. For a standard joint account with 50/50 ownership, each person reports half the interest. If you hold a term deposit in a trust or company structure, different tax rules apply, and you should seek professional advice.

What happens if I don't declare term deposit interest to the ATO?

The ATO receives data directly from Australian banks and financial institutions through the Annual Investment Income Report (AIIR) system. If your reported interest income does not match the bank's data, the ATO will flag your return for review, potentially triggering an audit, penalties, and interest on any unpaid tax. It is always better to declare all interest income accurately.

Does the Medicare levy apply to term deposit interest?

Yes. The Medicare levy of 2% applies to your taxable income including interest from term deposits. If you are a low-income earner below the Medicare levy threshold ($27,222 for FY 2025-26), you may be exempt or pay a reduced rate. Use the Medicare levy calculator to check your liability.

Can I claim deductions against my term deposit interest?

Generally, no. Unlike rental property income or business income, there are limited deductions available against interest income. You cannot deduct account-keeping fees, bank charges, or the cost of managing your investments unless they relate to a broader investment portfolio. However, if you borrowed money to purchase the term deposit (unusual but possible), the interest on that loan may be deductible.