Bank savings reform plan would benefit only a wealthy few
TAX REFORM is in the news again with a range of proposals being bandied about, among them one giving special tax concessions to money earned as interest.
It's is hard to fathom the reasoning behind the bank interest concessions.
The Gillard government started the idea with a promise to give a tax discount of 50% on up to $1000 of interest earned by individuals to bring the tax on this type of income into line with tax on capital gains.
It is a fundamental financial principle that an investor who seeks a higher return has to accept a greater risk.
The reason capital gains are concessionally taxed is because any investment that has the opportunity to provide capital gain also has the potential to give the investor a capital loss.
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A bank deposit should be riskless.
A major problem is that it ignores what happens in the real world.
Most young people are not savers but, even if they were, are almost certain to be in the 32.5% tax bracket which extends from $37,001 to $80,000 a year.
A 50% discount on $1000 of interest would be worth just $162 to them - hardly the price of a big night out.
Those between 25 and 45 are likely to be paying off a mortgage, and have a hefty credit card bill.
Why would they hold $25,000 or more in an interest bearing account when they could earn a much higher effective return by holding it in an offset account or paying it off their credit card?
Now think about the 45 to 65 group who are still working.
Most likely they will be in the 37% bracket so a 50% discount means they will be taxed at 18.5% on the first $1000 of their savings.
Surely, a much better strategy would be to keep the money in super where the earnings on the whole lot are taxed at just 15%?
The last group are over 65 and are either working or retired.
If they are working you can bet your life they are salary sacrificing as much as they can into super - if they are not working, they will probably pay no tax thanks to the Senior Australians Pensioners Tax Offset.
Withdrawals from superannuation for the over sixties are tax free and do not add to taxable income.
When you take all this into account, it is obvious the only people who would benefit from a 50% discount on savings are the wealthy elderly - there are not a lot of them about.
* NOEL WHITTAKER is the author of Making Money Made Simple, and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org