When you are living out side of Australia on a permanent basis, any interest that you may earn in Australia is not subject to income tax and you do not need to declare it in your tax return each year.
However, this is only when you have declared yourself as a non resident to the bank that pays you the interest and provided they have deducted a “Withholding Tax” (WHT).
For interest the WHT amount is 10% of the interest and will be deducted at the time that the interest is credited to your account.
If this is done then no further tax will be payable in Australia and, if you are required to declare it in the country you live, it may be possible to get a credit for the WHT to offset the tax in that country.
Many expatriates forget to tell their banks when they have left Australia and do not have the WHT charged, in which case you should declare the interest in your annual income tax return and you will be charged the 10% WHT at that time.
This is a common situation because we have usually informed the Bank of our Tax File Number while living in Australia as we are required to do, and they are wrongly assuming we are still in Australia.
You should be careful in this circumstance, as it is illegal for a non resident (even an expatriate) to use their Tax File Number to avoid WHT so you should inform the bank that you do indeed live overseas and make sure they begin deducting the WHT.
One option worthy of consideration is to hold your term deposit in an Australian Currency deposit in your country of residence, as then there are no requirements for WHT and the interest is not taxable in Australia as it is earned overseas by a non resident.
When you return to Australia later on, the original capital and any interest earned on your deposits during the time abroad will not be subject to any Australian tax, however you will need to declare the interest earned from the date of your return onwards, regardless of whether you bring the money into Australia or leave it in the offshore account.