Savings tax discount and IWT reform works in progress

Two areas where the government made policy decisions that would assist the financial services industry but did not implement those decisions successfully are the tax discount on savings and the removal of interest withholding tax on foreign-sourced savings.

The government opened up a significant new area of financial regulation when it introduced a tax discount on savings but its delivery was disappointing. Savers will get a 50 per cent discount on the tax that applies to the first $1000 of interest earned on deposits with banks, credit unions and building societies, as well as bonds, debentures and annuities.

Critics have said the $1000 limit does not create much incentive and compares poorly with benefits such as the capital gains tax discount and dividend imputation, which have no limits. The limit needs to be reviewed.

In March the government announced that various forms of interest withholding tax on financial institutions would be phased out or reduced over the next five years.

Financial institutions that raise offshore retail deposits currently pay 10 per cent withholding tax on the interest. The plan is to reduce that to 7.5 per cent in the 2013/14 financial year and then to five per cent in the 2014/15 year.

The government said its "aspirational target" was to reduce the tax to zero but no timeframe has been given for meeting that goal.

Australian banks would like to attract deposits from Asian households as a way of increasing the retail deposit pool. They see the removal of the taxes as an important step in achieving that goal. But so far there is no legislation to give effect to the policy.