With banks chasing funds, the interest rates on many savings accounts are at higher than expected levels. Rates approaching 8% for term deposits are not unheard of. The press is full of headlines that those looking to save are in the box seat. Well yes and no!
Those happiest about the investment rates currently on offer could well be the Government. And why not? In a country where we are taxed on every dollar of interest income from dollar one, increasing investment interest rates provide a boon to government revenues. And if the speculation is right, official interest rates WILL go higher, taking with them the rates banks will offer on savings accounts.
We haven’t seen investment rates currently on offer around for some little time and it is easy to get carried away with the publicised rates. BUT, it’s the after-tax rate that really counts. An investment rate of 6% for at-call money or on a term deposit for someone on a marginal tax rate of 38% reduces to a net (after-tax) return of 3.7% – not nearly as attractive as the 6% on offer.
We often hear that Australians have a poor savings record. While compulsory superannuation has been a positive step, the taxing of all interest income from dollar one could hardly qualify as an incentive to save.
Mortgage offset accounts and the like are fine, but for those trying to save enough to reach a goal – maybe a deposit on a home, a car or that overseas trip – losing a third or more of interest earned in tax is a big dent. Not to mention the prospect of potentially getting caught up in the Pay-As-You-Go (PAYG) tax collection system (ie the old provisional tax system essentially by a new name, although tax payments under PAYG are basically quarterly instead of annually under the old provisional tax system).
Also, apart from all that increased interest income being included in tax returns, just think of the data-matching undertaken by the ATO and the potential revenue results that might produce – from more people earning higher taxable interest income and overlooking to include it in their tax returns.
Perhaps the Henry tax system review might have something to say about investment incentives at the day-to-day level. How about exempting the first, say, $500 of interest income from tax. Now, that would be an incentive to save!
Of course, looking at revenue efficiency and compliance, the Henry review might also have something to say about imposing a withholding tax on interest and dividend income, but, in the Australian context, that might be seen as quite a radical step.
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