Steven Münchenberg, Chief Executive of the ABA, said: “The banking sector has been asking for incentives to encourage Australians to save via deposits so that existing tax-based distortions between different classes of investments will be reduced.”

“By encouraging more savings in deposits, incentives could restore an important and reliable funding source for Australian financial institutions and improve the low rates of national saving, in particular, lower-income household saving, which is a concern for retirement incomes.”

“A more equitable tax treatment of deposits will make the Australian economy less vulnerable to international financial shocks because of the reduced need for Australian banks to rely on foreign wholesale funding sources – which have been expensive and volatile throughout the global financial crisis.”
 
Currently, if a bank customer invests in a bank deposit, the interest earned on that deposit will be taxed at the marginal rate applied to their ordinary income and there is no income tax deduction. If that same customer decides to put their money into superannuation, the maximum taxation paid on their contribution (up to certain limits) is 15%. Earnings are also taxed at concessional rates.

A tax break on savings could bring Australia into line with other countries, where deposits are not taxed so severely. In an international taxation comparison report¹ released in 2008, it was revealed that Australia has one of the highest taxes on bank deposits of all countries surveyed.

Eliminating withholding tax on foreign-raised deposits could also help relieve some of the banks’ funding pressures.

Mr Münchenberg said: “Abolishing this tax would enable banks in Australia to raise deposits overseas for lending within Australia. It would provide banks with better access to liquidity and potentially reduce the cost of funding for customers.”