The Rudd Government will encourage Australians to save and help boost our national savings with a new tax incentive that cuts the tax paid on up to $1,000 of interest income from a range of savings products.
This major reform is expected to benefit around 5.7 million Australian depositors in 2011-12, helping to secure our financial system and strengthen our economy.
It will also help close the gap between the tax paid on interest income and other non-interest earning investments.
From 1 July 2011, the Government will provide individuals with a tax discount equal to 50 per cent on up to $1,000 of interest earned, including on deposits held with any bank, building society or credit union, as well as bonds, debentures or annuity products.
This means that for a person earning an average pre-tax interest rate of 6 per cent, the discount would apply up to a savings balance of just over $16,500.
This measure will help promote deposits as a tax-effective savings vehicle and encourage Australians to consider diversifying their investments.
Under the current system for taxing savings, there is a large variation in the taxation treatment of alternative savings vehicles. Most interest income is taxed at the individual's marginal rate, while capital gains can receive a 50 per cent discount.
Introducing this significant new discount for interest income will remove this distortion and deliver a better taxation regime for savings.
All banks, building societies and credit unions will benefit from a greater supply of stable deposit funding, which will reduce their requirement to borrow in international capital markets from overseas investors.
Since deposits typically represent a high proportion of funding for smaller lenders, this reform should help put downward pressure on their funding costs. This is expected to support them in lending at competitive interest rates to Australian households and small businesses.
The Government is committed to boosting competition in the banking sector following the impacts of the financial crisis so that it works for families and businesses, not against them.
Today's announcement responds to an important recommendation of the independent Australia's Future Tax System review, to provide a tax discount on interest income from savings.
The Government will consult on details concerning the operation of the discount, including on the final scope of eligible savings products.
11 May 2010