By Eric Johnston
Major banks are set to win a funding injection after the Rudd government decided to adopt measures to encourage individuals to plough more funds into savings through a bigger-than-expected tax break on deposits.
The tax break could ease funding costs and in turn reduce pressure on banks to pass on higher interest rates to mortgage customers.
At the same time, the government has also backed calls by global banks with operations here to scrap the 10 per cent interest withholding tax on accessing deposits held by banks' parent companies offshore.
The recent Henry Tax Review recommended a 40 per cent discount apply to income from interest. However the measures provide a 50 per cent discount on up to $1000 of interest earned. The concession also applies to bonds and annuity style investment products, potentially benefiting wealth managers such as Challenger or AMP.
At pre-tax interest rates of 6 per cent the discount would apply to savings balance of just over $16,500.
Lenders have been lobbying for a reduction in marginal tax rates on savings to help fix a structural issue with the banks' funding base which means they lend out more than they generate through deposits.
Under current rules bank deposits have the highest effective marginal tax rates of all savings which includes property, superannuation or listed shares.
Tax on bank account savings also ranks as one of the highest in the world. Combined, the measures are expected to reduce banks' reliance on costly wholesale funding - a key driver of banks passing on interest rate rises in excess of moves by the Reserve Bank. A little under half the lending book for big banks is made up of wholesale funds, where pricing - particularly for long term funding - has skyrocketed since the onset of the credit crisis.
The tax break on interest, which starts from July next year, is forecast to cost $950 million over the next three years. While this figure may seem low, experience offshore, particularly in the UK, shows not all savers take up the scheme.
ejohnston@theage.com.au