Saving more, paying more: is your Cash costing you tax?

Many couples approaching retirement hold a significant cash buffer in a joint bank account or term deposit, often without ever turning their mind to how the interest on that balance is actually taxed. It seems a natural thing: it’s been a shared effort to save and build that money, it’s equally yours, why wouldn’t you hold it jointly? However, this can simple structure can easily cost thousands in unnecessary tax in the Australian tax system.

How the ATO treats interest on a joint account

The ATO's default position on a standard joint bank account or term deposit is that interest income is split according to each account holder's legal ownership share. For most joint accounts, that share is treated as equal, so each partner declares half the interest on their own tax return, regardless of who originally contributed the funds or whose salary built up the balance in the first place.

For a couple where one partner earns substantially more than the other, an even split is not automatically the best outcome. It is simply the default one, and it unlikely to reflect either partner's actual marginal tax rate as well as a different structure might.

A case study: John and Jane Savehard

John and Jane are in their late fifties. Jane built a successful career after taking some time off work to start a family and now earns $200,000 a year. John made a work-life career change after getting injured at work and has decided to work part-time, earning much less. Between them, they've saved $150,000 in term deposits, sitting at an indicative rate of 4 per cent. That's $6,000 in interest each year.

Because the account is in both their names, the interest is split evenly. Jane declares $3,000 on her tax return, and so does John.

Jane's marginal tax rate is 45 cents in the dollar, plus the 2 per cent Medicare levy. That's a combined rate of 47 per cent. On her $3,000 share, she pays $1,410 in tax.

John's income is much lower, so his share falls within the 15 per cent tax bracket, plus the 2 per cent Medicare levy also (for a total of 17%). He pays $510 in tax on her $3,000.

Together, they pay $1,920 in tax on the interest, and keep $4,080.

Now imagine the term deposit was held in John's name alone, reflecting money that's genuinely theirs together but simply parked under one name. The full $6,000 is taxed at John's rate. At 17 per cent, that's $1,020 in tax, leaving $4,980 after tax. That's $900 more in their pocket each year, just from where the money sits.

These figures are illustrative, using rounded numbers to show the principle rather than a personalised calculation. However, the same mechanism applies to any couple with a meaningful gap between their two marginal tax rates, and not just for cash, but all personally owned investments.

What can be done about it

There are a few ways to address this. Which one suits depends on the couple's broader circumstances. Where the money genuinely belongs to, or makes more sense sitting with, the lower-earning partner, holding it in their name alone can mean the full amount of interest is taxed at their lower rate.

Spousal contributions can be another option. Some of the surplus cash can be directed into the lower-earning partner's superannuation, where investment earnings are taxed concessionally rather than at personal marginal rates.

For couples in the higher tax brackets, an Investment Bond is worth considering too. Tax is paid inside the bond at a flat rate, rather than declared on a personal tax return, which can reduce the household's overall tax without needing to lock the money away in superannuation.

None of this means the couple did anything wrong. Joint accounts are the default setup for most Australian households. They're often opened long before the savings get significant enough that tax is a real priority, and they are the default, logical choice for a shared-finances household.

Along the way, as savings become significant and the interest earned become a source of pride, people often neglect to reflect back and think if this still makes sense, even as their tax return moves from a refund to a bill.

However, once we start to question if we are making the most of our situation now that things have changed from being debtors to being savers, this becomes one of the simpler, if still powerful, improvements that can be discovered. What other opportunities do you have that are just sitting there, ready to make the most of?