Is There GST on Bank Fees, Interest and Financial Services? A Definitive Guide

Introduction

For many sole traders and small business operators, the question “Is there GST on bank fees?” is surprisingly complex. While most goods and services you buy include GST (which you can claim back as an input tax credit), financial supplies are treated differently under Australia’s GST law. This article explains the GST treatment of common financial services – bank fees, interest, loans, insurance, and foreign currency transactions – and provides practical guidance for your business.

1. The Core Principle: Financial Supplies Are Input‑Taxed

Under the A New Tax System (Goods and Services Tax) Act 1999, most financial supplies are input‑taxed. This means:

• No GST is charged on the supply itself (e.g., no GST on interest you earn or on bank account fees).
• You cannot claim full input tax credits on acquisitions that relate to making financial supplies (e.g., bank fees, loan establishment costs).

However, you may be entitled to a reduced input tax credit (RITC) – typically 75% of the GST incurred – if you are registered for GST and the acquisition relates to a financial supply.

2. GST on Bank Fees and Account‑Keeping Charges

Monthly account fees, transaction fees, and ATM charges

Most bank fees are considered consideration for a financial supply. Therefore:

• The bank does not charge GST on these fees.
• You cannot claim a full input tax credit on the fee.
• If the fee is directly related to making financial supplies (e.g., a business transaction account used for lending), you may claim a 75% RITC on the GST component (if the bank had charged GST, which it doesn’t – but the RITC rules apply to the notional GST).

Practical example: Your business pays a $10 monthly account‑keeping fee. The bank does not charge GST. You cannot claim any input tax credit because there is no GST to claim. However, if the fee were subject to GST (e.g., a non‑financial service like a safe deposit box), you would claim the full GST.

Merchant fees and credit card processing fees

Merchant service fees charged by banks for processing credit/debit card payments are also input‑taxed supplies. No GST is charged, and no input tax credit is available (except possibly RITC if the fee relates to financial supplies).

3. GST on Interest – Earned and Paid

Interest income (e.g., from term deposits, savings accounts)

Interest you receive is consideration for a financial supply (the provision of credit). It is input‑taxed – no GST is payable on the interest, and you do not issue a tax invoice. This is important for businesses that earn interest: you do not include it in your GST turnover for registration purposes, but it may affect your entitlement to input tax credits if you are a financial supply provider.

Interest expense (e.g., loan interest, mortgage interest)

Interest you pay on borrowings is also input‑taxed. The lender does not charge GST, and you cannot claim an input tax credit on the interest. However, if the loan is used to acquire an asset that is used to make taxable supplies (e.g., a business vehicle), the interest expense is still input‑taxed – you cannot claim the GST. This is a common trap for small businesses.

Expert tip: If you borrow money to buy a business asset, you can claim input tax credits on the purchase price of the asset (if it’s a taxable supply), but not on the interest. Keep your loan documentation separate to avoid confusion on BAS.

4. GST on Loans, Mortgages, and Loan Establishment Fees

Loan establishment fees and discharge fees

These fees are consideration for the supply of credit (a financial supply). They are input‑taxed – no GST is charged, and no input tax credit is available (except RITC if applicable).

Mortgage registration and stamp duty

State government charges like mortgage stamp duty are not subject to GST. They are not a supply for GST purposes.

Loan guarantee fees

Fees for guarantees are also financial supplies – input‑taxed.

5. GST on Insurance Premiums and Claims

General insurance (e.g., public liability, professional indemnity)

Insurance is a financial supply. Premiums are input‑taxed – no GST is charged, and you cannot claim input tax credits on the premium. However, if the insurance is for a business asset used to make taxable supplies, you may be entitled to a 75% RITC on the GST component (notional).

Life insurance and health insurance

These are also input‑taxed. No GST on premiums, no input tax credits.

Insurance claims and payouts

When you receive an insurance payout, it is not a supply for GST purposes – no GST is payable. However, if the payout relates to a lost or damaged asset, you may need to adjust your input tax credits previously claimed on that asset.

6. GST on Foreign Currency and International Transactions

Foreign exchange (FX) services

Supplying foreign currency is a financial supply. Banks and FX providers do not charge GST on the exchange spread or fees. However, if you are an importer paying overseas suppliers, the FX conversion itself is input‑taxed.

International money transfers

Transfer fees are input‑taxed. No GST, no input tax credit.

Cross‑border financial supplies – the “connected with Australia” rule

If you provide financial services to a non‑resident, the supply may be GST‑free (not input‑taxed) if it is not connected with Australia. This is a complex area – seek advice if you export financial services.

7. Reduced Input Tax Credits (RITCs) – How They Work

If you are registered for GST and you make financial supplies, you may be entitled to claim a reduced input tax credit on certain acquisitions that relate to making those financial supplies. The RITC rate is generally 75% of the GST incurred. Common examples:

• Account‑keeping fees on a business transaction account used for lending.
• Merchant service fees for processing credit card payments (if the fees relate to financial supplies).
• Insurance premiums for business assets used in financial supply activities.

To claim RITCs, you must hold a valid tax invoice (or RITC‑eligible document) and report the amounts in your BAS. The ATO provides a list of RITC‑eligible acquisitions in GSTR 2006/3.

8. Record‑Keeping and BAS Reporting for Financial Supplies

What to record

• Bank statements showing fees and interest.
• Loan contracts and fee schedules.
• Insurance policies and premium invoices.
• FX transaction confirmations.

How to report on BAS

Financial supplies affect your BAS in two ways:

1. G1 – Total sales: Do not include input‑taxed supplies (e.g., interest income) in G1. Only include taxable and GST‑free sales.
2. G11 – Purchases: You can claim RITCs in the “Capital purchases” or “Other purchases” labels, depending on the nature. Use the RITC rate (75%) on the GST‑inclusive amount.

Warning: Many small businesses mistakenly claim full input tax credits on bank fees. The ATO may audit and disallow these claims. Always check if the fee is for a financial supply.

GST Calculator & Tools

Our GST Calculator Australia suite includes dedicated tools to help you handle financial supplies:

• GST Calculator – Add or remove GST from any amount. Useful for checking the GST component of mixed supplies.
• RITC Calculator – Quickly calculate the reduced input tax credit (75%) on a GST‑inclusive amount.
• BAS Calculator – Estimate your net GST payable/refund, including adjustments for input‑taxed supplies.

Step‑by‑step: Using the RITC Calculator

1. Go to gstcalculatorau.com/ritc-calculator.
2. Enter the total amount of the bank fee or insurance premium (including notional GST).
3. Select “Financial supply – RITC 75%”.
4. The calculator shows the RITC amount you can claim.

Common GST Mistakes to Avoid

• Claiming full ITC on bank fees: Bank fees are input‑taxed – no GST is charged, so no ITC. Only RITC may apply if the fee relates to financial supplies.
• Including interest income in GST turnover: Interest is input‑taxed and should not be included in G1 or in the $75,000 turnover threshold for registration.
• Forgetting RITCs: Many businesses miss out on claiming 75% of the notional GST on eligible financial supply acquisitions.
• Treating insurance claims as GST‑inclusive: Insurance payouts are not supplies – no GST is payable or creditable.
• Ignoring the “connected with Australia” rule for cross‑border financial services: If you provide financial services to overseas clients, the supply may be GST‑free, not input‑taxed.

Conclusion

Understanding the GST treatment of bank fees, interest, and financial services is essential for accurate BAS reporting and maximising your input tax credits. Remember: most financial supplies are input‑taxed – no GST is charged, and you cannot claim full ITCs. However, reduced input tax credits (RITCs) may be available for certain acquisitions. Use our GST Calculator Australia tools to simplify your calculations, and always consult a registered tax agent for your specific circumstances.