Interest earned in a savings account is assessable income and taxed at your marginal rate. Interest saved by an offset account is not income at all, so it is never taxed. In 2026-27 a savings account would need to pay between 8.12% and 10.42% to match a 5.52% offset, depending on what you earn.
Most people compare the two on the headline rate. That comparison is wrong before it starts, because the two numbers are not the same kind of number. One is a rate you are taxed on. The other is a rate you are not. At the top marginal rate the gap between them is close to double.
Mina Baselyous is a Chartered Tax Advisor (CTA), Certified Practising Accountant (CPA) and Registered Tax Agent. Below is the arithmetic at four income levels, plus a second effect that almost nobody models and that can cost more than the interest difference itself.
Why One Is Taxed and the Other Is Not
A savings account pays you interest. That interest is income, it goes in your tax return, and it is taxed at your marginal rate. An offset account pays you nothing. It reduces the balance your lender charges interest on, so you simply pay less interest. There is no receipt, so there is nothing to assess.
That is the whole mechanism, and it is worth stating plainly because the language hides it. People talk about an offset account “earning” 5.52%. It does not earn anything. It avoids an expense. Avoided expenses are not income, and Australia does not tax you on money you did not spend.
In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the clients who get this wrong are usually the disciplined savers. They have built a solid cash balance, they are proud of the interest it earns, and nobody has ever shown them what that interest costs them after tax.
What a Savings Account Would Have to Pay to Match Your Offset
To match an offset, a savings account has to pay enough to cover the tax and still leave you the same amount. The formula is the offset rate divided by one minus your marginal rate. Against a 5.52% offset, that means 8.12% at a $100,000 income and 10.42% once you are on the top rate.
The 5.52% figure is the average outstanding variable rate for owner-occupiers reported by the Reserve Bank of Australia as at the July 2026 data release. Marginal rates below include the 2% Medicare levy and use the ATO resident tax rates for 2026-27.
| Taxable income | Marginal rate | Savings rate needed to match a 5.52% offset |
|---|---|---|
| $100,000 | 32% | 8.12% |
| $150,000 | 39% | 9.05% |
| $200,000 | 47% | 10.42% |
| $250,000 | 47% | 10.42% |
No at-call savings account in Australia is paying 10.42%. That is the point. For anyone with a mortgage and a top marginal rate, the offset wins by a margin no deposit product can realistically close.
Notice too that $200,000 and $250,000 give the identical answer. The top marginal rate starts at $190,000, so the advantage stops growing there. It does not keep scaling with income, which is worth knowing before anyone tells you it does.
The Dollar Difference on $100,000
On $100,000 of cash, the offset saves $5,520 of mortgage interest and none of it is taxed. A savings account at 4.50% earns $4,500 before tax and between $2,385 and $3,060 after it. The annual difference runs from $2,460 to $3,135 depending on your income.
The 4.50% savings rate below is an assumption for illustration, not a quoted product rate. Substitute whatever your own account actually pays. The structure of the answer does not change, only the size of it.
| Taxable income | Offset saves | Savings interest | Tax on it | Kept after tax | Offset ahead by |
|---|---|---|---|---|---|
| $100,000 | $5,520 | $4,500 | $1,440 | $3,060 | $2,460 |
| $150,000 | $5,520 | $4,500 | $1,755 | $2,745 | $2,775 |
| $200,000 | $5,520 | $4,500 | $2,115 | $2,385 | $3,135 |
| $250,000 | $5,520 | $4,500 | $2,115 | $2,385 | $3,135 |
Over ten years, and without compounding, the top-rate difference is more than $31,000. That is on a cash balance many established business owners hold as a matter of course.
Holding cash in the wrong place across your business and personal accounts?
At Pinnacle, we look at where a family’s cash actually sits and what each dollar is costing in tax it did not need to pay. Book a consultation with Mina to find out where you stand.
Book a ConsultationThe Second Effect Almost Nobody Models
Savings interest does not just get taxed. It lifts your income, and several tax thresholds are cliffs rather than slopes. Crossing one can cost you more than the interest was worth. Offset savings never do this, because they never appear in your income at all.
Two examples make the point.
Medicare levy surcharge
A single person on $100,000 with no private hospital cover sits under the surcharge threshold, which starts at $105,001 for 2026-27 according to the ATO surcharge thresholds. Put $150,000 in a savings account at 4.50% and the $6,750 of interest lifts income to $106,750. The surcharge now applies at 1% of the whole amount, which is $1,068.
The same $150,000 in an offset produces no income, so income stays at $100,000 and the surcharge is nil. Adding the interest gap to the surcharge, the total annual difference is about $4,758 on that one decision.
Division 293
Division 293 adds 15% to concessional super contributions once combined income and contributions exceed $250,000, a threshold that has applied since 2017-18 per the ATO. Someone on $215,000 making the full $32,500 concessional contribution for 2026-27 sits at $247,500 and pays none of it.
Add $250,000 of savings at 4.50%, and $11,250 of interest pushes the total to $258,750. The excess is $8,750, so Division 293 tax of $1,312 now applies. It was triggered entirely by where the cash was parked. In an offset, the same money produces no income and the threshold is never crossed.
When the Offset Advantage Shrinks
The full advantage applies to a loan on your main residence, where the interest was never deductible. On an investment loan it is smaller, because the offset reduces an expense you were claiming. You still come out ahead, but only by the after-tax margin rather than the whole rate.
This is the single most common error we correct. An owner with both a home loan and an investment loan puts the cash against the investment loan because the balance is larger, and quietly gives up the better outcome. If you hold both, the offset almost always belongs against the non-deductible debt first.
Related reading: our guide to investment property ownership structures and tax, and tax planning for property investors. If the cash you are thinking of moving sits inside a company, read borrowing from your company to fund your offset account first, because Division 7A applies before any of this does.
A note on scope
This article compares the tax treatment of interest earned against interest saved. It is not a recommendation about any banking or deposit product, and it does not consider your liquidity needs, loan features, fees, deposit guarantees or personal circumstances. Pinnacle Accounting & Advisory provides tax and business advisory services and does not provide financial product advice. Speak to a licensed financial adviser about product selection.
How We Use This With Clients
We map where the family’s cash actually sits, then work out the after-tax return on each pool. The question is never which account pays the best headline rate. It is which dollar is working hardest once tax, thresholds and deductibility are all accounted for.
In our experience working with Melbourne business owners, the money is rarely in one place. There is cash in the trading company, a term deposit somebody opened years ago, a redraw facility nobody uses and an offset sitting half empty. Moving it is usually simple. Knowing which move is worth making, and which one triggers a tax consequence on the way, is the part worth paying for. You can read more about our tax planning work.
Frequently Asked Questions
Is interest earned on an offset account taxable?
There is no interest earned on an offset account, so there is nothing to tax. An offset reduces the loan balance your lender charges interest on, so you simply pay less. Because you never receive a payment, no income arises and nothing goes in your tax return.
Is an offset account better than a savings account for tax?
Yes, for anyone with a mortgage. Savings interest is assessable at your marginal rate while offset savings are not income at all. Against a 5.52% offset in 2026-27, a savings account would need to pay 8.12% at a $100,000 income and 10.42% at the top rate just to break even.
Do I have to declare offset account savings in my tax return?
No. There is no amount to declare because no income has been derived. A savings account is different: the bank reports the interest to the ATO, it appears in your prefill, and it must be included in your return for the year it was credited.
Does it matter whether the loan is on my home or an investment property?
Yes, significantly. On a main residence the interest was never deductible, so the full saving is a clean benefit. On an investment loan the offset reduces a deductible expense, so your net benefit is only the after-tax margin. If you hold both, the offset usually belongs against the home loan first.
Can savings interest push me over a tax threshold?
Yes, and this is often overlooked. Interest lifts your taxable income, which can trigger the Medicare levy surcharge or Division 293 tax on super contributions. Both are cliffs rather than slopes, so crossing one can cost more than the interest was worth. Offset savings never appear in income at all.
What rate should I use to work out my own comparison?
Divide your offset rate by one minus your marginal rate, including the 2% Medicare levy. That gives the savings rate you would need to break even. Compare it to what your account actually pays. If the required rate is higher, which it almost always is, the offset wins.
General Advice Disclaimer: The information in this article is general in nature and does not constitute personal financial, tax, or legal advice. It has been prepared without taking into account your personal objectives, financial situation, or needs. Before acting on anything in this article, consider its appropriateness to your circumstances and seek advice from a registered tax adviser or CPA. Liability limited by a scheme approved under Professional Standards Legislation.
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