How Much Tax on Bank Interest in Australia? 2026-27 Guide

The short answer

Every dollar of interest your bank pays you in 2026-27 is assessable income. Australia has no tax-free savings account, no de minimis amount, and no separate “interest tax rate” — your interest is added to your other income and taxed at your marginal rate plus the 2% Medicare levy. At the 30% bracket that is 32c in the dollar; at the top rate, 47c.

Two things trip people up. First, the widely quoted “$120 threshold” is not a reporting or tax-free threshold — it is the trigger for TFN withholding. Second, if your bank does not hold your Tax File Number, it withholds 47% of your interest and sends it to the ATO: a prepayment, not extra tax, but you wait until tax time to get the difference back. This guide runs the real 2026-27 numbers, covering the joint-account 50/50 trap, term-deposit timing across financial years, and why a mortgage offset account usually beats a savings account.

How bank interest is taxed: the mechanics

The ATO treats interest from a bank, building society or credit union like wages: it goes into your assessable income, your marginal rates apply, and the 2% Medicare levy is added on top. Your bank reports the interest it paid you to the ATO each financial year, and it usually appears pre-filled in myTax — which is why “forgetting” to declare it is the fastest way to earn an adjustment letter plus penalties. The ATO’s own guide to investing in bank accounts states the position plainly.

You pay tax on the interest, never on the balance. And note the Medicare levy has its own phase-in: singles start paying it from $28,011 in 2026-27, so someone in the 15% bracket earning under that pays no levy at all — 15c in the dollar on their interest, not 17c.

2026-27 rates and what they cost you on interest

*Approximate, on interest sitting wholly inside the bracket. The 15% second bracket is new from 1 July 2026 — several ranking guides still show 2025-26’s 16c, and some still show the old 32.5%/37% brackets from before the Stage 3 redesign. Check the year on any table you use. Our income tax rates guide has the full 2026-27 picture.

Step-by-step: working out the tax on your interest

1. Total your interest from every account — savings, term deposits, even the few dollars on your everyday account. The ATO gets a figure from each bank; your total should match.
2. Add it to your other taxable income. Salary + interest + anything else = taxable income. Interest has no separate rate — it is taxed at whatever marginal rate it lands in.
3. Apply your marginal rate (plus 2% Medicare levy). Only the slice of interest in each bracket is taxed at that bracket’s rate.
4. Check bracket-bump risk. Salary sitting just under a bracket edge means even modest interest can push part of it into the next rate — worked below.
5. Run it through a calculator. Our income tax calculator shows your 2026-27 liability with and without the interest, so you see exactly what it cost you.

Worked example: Mia’s $85,000 salary and $3,200 of interest

Mia earns $85,000 and her savings account paid $3,200 in 2026-27. Taxable income: $88,200.

• Income tax: $4,020 + 30c × ($88,200 − $45,000) = $4,020 + $12,960 = $16,980
• Medicare levy: 2% × $88,200 = $1,764
• Total: $18,744

Without the interest she would have paid $17,720 — so the $3,200 of interest cost her $1,024, exactly 32%. Your interest is taxed at the top of your income stack, not at an average rate.

The bracket-bump trap

Tom earns $134,000 salary plus $2,000 interest — $136,000 total, $1,000 over the $135,000 bracket edge. Tax without interest: $30,720. With interest: $31,020 on the first $135,000 plus 37c × $1,000 = $31,390. The $2,000 of interest cost $670 — a 33.5% effective rate, above his normal 32%. Anyone near $45,000 or $135,000 should check where their interest lands.

The $120 myth: the most misunderstood number in savings tax

You will see “$120” quoted online as though small interest is tax-free. It is not. The ATO’s rule: if an account earns $120 or more of interest in a year ($10 a month per account) and the bank does not hold your TFN, it must withhold at 47%. That is all $120 is — the trigger for withholding, not a reporting threshold and not a tax-free amount.

• All interest is assessable, from the first dollar. Declare it even if your total income stays under the $18,200 tax-free threshold — you may owe no tax, but you still declare it.
• The bank reports your interest to the ATO regardless of amount. Nothing is too small to be visible.
• The under-16 rule works the same way: a child under 16 with their own account earning under $420 a year need not quote a TFN to avoid withholding — but the interest is still assessable income.

No TFN? Your bank takes 47% — here is how you get the difference back

Without your TFN on file (and $120+ of interest), the bank must withhold at the top marginal rate plus Medicare levy: 45% + 2% = 47% — on savings accounts, interest-bearing cheque accounts and term deposits alike. The money goes straight to the ATO; the bank keeps none of it.

That 47% is a prepayment, not extra tax. On your return you declare the gross interest and claim the withheld amount as a credit. Example: Priya earns $80,000 plus $2,000 interest, never gave her bank her TFN, and $940 was withheld through the year. Her real tax on the interest at 32% is $640 — so $300 comes back with her refund. The money was never lost; it just sat with the ATO instead of compounding in her account.

Three things the other guides skip:

• Declare the gross. Put the full $2,000 at the interest label and the $940 at the credit label. Declaring only the net $1,060 is what data-matching flags.
• Give the bank your TFN now anyway. One five-minute update per bank stops future withholding permanently.
• The belated-TFN window. Provide your TFN after withholding happened and you can ask the bank to repay it — but only until around 14 July following the financial year. After that, the tax return is your only path (and for earlier years, lodge amendments to claim those credits).

Joint accounts: the 50/50 default and how it is rebutted

The ATO’s starting position for a joint account is that each holder beneficially owns the money equally — a couple each declares half the interest. But that is a rebuttable presumption: interest is assessable in proportion to beneficial ownership, and evidence of who contributed and who used the money can override it.

In dollars: a joint account earns $6,000. Partner A earns $130,000 (32% marginal), Partner B earns $40,000 (15% + levy = 17%). Default 50/50: A pays $960 on their $3,000, B pays $510 on theirs — $1,470 total. If the money was genuinely all B’s in B’s own account: $6,000 × 17% = $1,020. A $450 difference — but only if the ownership is real. Parking your money in your lower-earning partner’s account while you control and spend it changes nothing in the ATO’s eyes. (And a joint account needs both holders’ TFNs quoted, or the bank withholds on the whole amount — the $120 threshold does not double.)

Term deposits: when the interest counts (the cross-year trap)

The ATO’s timing rule: declare interest in the year it is credited, received, or dealt with on your behalf — for a term deposit, usually the year it matures, all of it, even if it accrued across two financial years. The ATO’s investment income guide confirms the treatment.

Example: a $50,000 12-month term deposit opened January 2027 at 4.5% matures January 2028 paying $2,250. The entire $2,250 is declared on your 2027-28 return. If it rolls over automatically at maturity, that counts as receiving the interest — declare it at the rollover date even though you never touched it.

Watch two things: the 47% no-TFN withholding applies to term deposits too, and a large maturity payment can make it a nasty surprise if you skipped the TFN when you opened it. And if your deposit pays interest periodically (quarterly, say), each payment is assessable when paid — which side of 30 June it falls on is a genuine planning lever.

Kids’ accounts: it is not about whose name is on it

The ATO ignores the account name. Who declares the interest depends on who provides the money and who decides how it is spent — regardless of who it is spent on. Your money, spent as you like (school fees, family expenses), means the interest is yours, even in your child’s name. Genuinely the child’s money (gifts, their own earnings), used only by the child, means it is the child’s. The ATO’s children’s savings accounts guide works through both cases.

The warning: minors face penalty rates on unearned income — a tax-free threshold of only $416, then 66% to $1,307, then 45% above. Those rates exist to stop parents funnelling investment income through their kids, and they make income-splitting via children’s accounts an expensive idea. (A child’s wages are taxed normally; it is the unearned interest and dividends that attract the penalty rates.)

Offset accounts vs savings accounts (and the redraw trap)

With a home loan, the best “savings account” is often an offset account. Money in a 100% offset reduces your mortgage interest — and that saving is not income, so it is never taxed. Worked: loan rate 6.2%, savings paying 5.0%, marginal rate 32%. $10,000 in the offset saves $620 a year, untaxed. $10,000 in savings earns $500, loses $160 to tax, keeps $340. The offset wins by $280 a year on the same $10,000, with no tax paperwork.

The related trap is redraw: interest on funds you redraw and use for personal purposes — a car, a holiday — is not tax-deductible, even though it looks like “loan interest”. An offset keeps the loan balance untouched, which is also why accountants prefer it if the home might later become an investment property.

Common mistakes

1. Treating $120 as invisible. It is a withholding trigger, not a reporting threshold. Declare everything — the bank already told the ATO.

2. Declaring net interest after withholding. Declare the gross, claim the credit. Net-only figures are what data-matching catches.

3. Assuming a quoted TFN means nothing to declare. Quoting stops the 47% withholding; the interest is still assessable.

4. Splitting joint interest 50/50 when the money is all yours. The default stands only if ownership is genuinely equal.

5. Forgetting term-deposit timing. A 12-month TD maturing in July 2027 goes on the 2026-27 return — all of it.

6. Thinking the bank keeps withheld tax. It never does. Give them your TFN, and claim the credit on your return (or ask for repayment before ~14 July).

7. Ignoring bracket edges. Near $45,000 or $135,000, your interest can be taxed above your normal rate.

Tips to keep more of your interest

• Quote your TFN at every bank, once. Five minutes per institution ends 47% withholding everywhere.
• With a mortgage, fill the offset first. The after-tax return usually beats any savings account.
• Time term deposits around 30 June. A maturity in early July pushes the whole interest bill into next year’s return.
• Keep a one-line interest log. Statements and the pre-filled myTax figure should agree; foreign accounts are not pre-filled, so track those yourself — residents must declare overseas interest too.
• Claim what it cost you to earn it. Expenses incurred in earning interest income can be deductible — see our deductions checklist for the record-keeping rules.
• Moved overseas? Tell your bank. Residents’ interest is reported and self-assessed; non-residents face 10% withholding (with an overseas address on file) that is final. If your residency changed mid-year, check our tax residency guide.

FAQ

Do I pay tax on bank interest if I earn under $18,200?

Declare all of it, but you may owe nothing: the tax-free threshold plus the Low Income Tax Offset means no income tax until about $22,867 for a full-year resident, and the Medicare levy only phases in from $28,011 for singles. Low or no tax — never “no need to declare”.

My bank withheld 47% because I never gave my TFN. How do I get it back?

Lodge your return, declare the gross interest as income, and claim the withheld amount as a credit — the excess returns as part of your refund. If you have now given the bank your TFN, you can also ask the bank directly, but only until around 14 July after the financial year.

Does the $120 rule mean interest under $120 is tax-free?

No. $120 per account per year is the point at which your bank must withhold 47% without your TFN. Every dollar of interest is assessable and must be declared, however small.

My term deposit was opened in 2026 but matures in 2027 — which year’s return?

The maturity year (or the rollover date). Interest is assessable when credited or received, so a deposit maturing in January 2028 is declared on your 2027-28 return even though most of it accrued in 2026-27.

My partner earns nothing. Can we split our joint account interest 50/50?

The ATO defaults to 50/50, but the split follows beneficial ownership. If all the money was yours and you control it, the interest is all yours to declare — manufactured splits to shift income do not survive the attribution rules.

Whose income is the interest in my child’s savings account?

Whoever’s money it really is: your deposits spent as you like = your income; genuinely the child’s money used only by the child = the child’s. But watch the minor penalty rates on unearned income over $416 — income-splitting through kids is an expensive idea.

The bottom line

Bank interest in 2026-27 is taxed at your marginal rate plus 2% Medicare levy, from the first dollar — the “$120 threshold” only controls when your bank must withhold 47% without your TFN. Give every bank your TFN once, declare the gross interest (the ATO already has the figure), watch the bracket edges near $45,000 and $135,000, and remember that a 100% offset account beats a savings account on an after-tax basis for almost every mortgage holder. Run your own numbers on our income tax calculator before tax time surprises you.