Savings Account Tax Tips

Most people take tax as a foregone expense, most especially savings tax since it is automatically debited from ones bank account.

George Cochrane of Cochrane Investment Services Pty Ltd believes this should not be the case. Some knowledge in tax laws will go a long way in helping customers save extra dollars on their savings accounts.

Cochrane gives as an example a couple who saves $150 each month in the accounts of primary age children.  The savings has grown to $1000.00 each and have to pay 66 percent on earned interest over $416.

While it is true that “children under 18 can no longer access the low income earners tax offset that counteracts the first $1500 of tax,” Cochrane identifies another option to save on taxes.

Saving in an online account can earn around 4.75 percent from a bank, putting a $1000.00 savings over the $416 limit. Since paren’ts are likely to be paying tax at a lower rate, Cochrane suggest that paren’ts invest a portion of the money in their names.

“Possibly using a term deposit paying, say, 6 percent? It might be a good idea to move soon if, as is forecast by some analysts, interest rates may be cut some time in the near future. By explaining all of this to the children, you will also be educating them that tax and timing are major factors when saving money,” Cochrane explains.

More Good News

Aussies should be looking forward to July 1, 2012 when the Gillard government pushes through with its proposed savings discount.

The savings discount will be similar to the 50 percent capital-gains tax discount, wherein in only half of the interest received will be subject to tax, up to a maximum $500 of interest in 2012/13 and $1000 after that.

Earning $1000 of net interest in the 2012-13 financial year yields a 50 percent tax discount on the first $500.

Thus, the first $250 of interest would not be taxed and the customer would need to pay tax only on the remaining $750.

It gets better in the following year, wherein the first $500 of the $1000 interest would not be taxed, consequently only the $500 interest is taxed.

“For someone on the 31.5 per cent marginal rate, this would mean a tax cut of $154 once the full discount is in place,”.

The discount will apply to only to net interest earned. Any expenses incurred in earning the interest will be deducted before the discount applies. The discount will apply to a customer’s total net interest if the customer earns income from more than one source.

The discount applies to all interest-like income that currently doesn’t attract a tax concession like: income from deposit products offered by banks and other financial institutions, bonds, debentures, convertible notes and similar products, as well as non-superannuation annuities. The interest paid by the Tax Office on early or overpayments of tax will also attract the discount.

Furthermore, the government says because the discount will reduce assessable income, which may increase the entitlement to income-tested benefits such as family tax benefit, child care benefit, education tax refund and the seniors supplement.