Banks accounts are often held in joint names and sometimes operated by one person for the benefit of another. So who is assessed on the interest earned by these accounts?

For income tax purposes, the interest income on a bank account is generally assessable to the account holders in proportion to their beneficial ownership of the money in the account.

Joint accounts

Unless there is evidence to the contrary, the ATO assumes that joint account holders own the money in equal shares and benefit equally. However, this can be refuted if there is clear evidence to show that one of the joint account holders manages the money in the account for the benefit of the other person.

Joint signatory (but no beneficial ownership of account): Amy’s elderly aunt has a bank account in her name and Amy is a joint signatory to that account. Amy will only operate the account if her aunt is unable to do so due to ill health. All the funds in the account are the aunt’s and Amy is not entitled to personally receive any money from the account. In this case, Amy does not have any beneficial ownership of the money in the account and is therefore not assessable on the interest income.

Childrens’ bank accounts

For a bank account operated by a parent on behalf of a child where the child beneficially owns the money in the account, the parent can show the interest in a tax return lodged for the child. It is worth noting that the tax-free threshold for a child minor is $416 and the tax rate starts at 66% for earnings over that threshold.

Interest on a savings account: Kane is 14 years of age and has accumulated $7,000 over the years from birthdays and other special occasions. His mother has placed the money into a bank account in his name, which she operates on his behalf, but she does not use the money in the account for herself or others. Kane earned $490 in interest during the income year and, since he has beneficial ownership of the money in the account, he is therefore assessable on all of the interest income. However, as he is under 18 years old, he is subject to the tax rate. If he shows the interest in his tax return for that income year, his mother will not need to lodge a trust tax return.

If you have children in similar circumstances paying the higher tax rate, talk to us and we might be able to recommend a strategy to lower the amount of tax to be paid.