Our yarn this morning about the banks lobbying hard in Canberra for tax exemption of interest income has sparked something of a furor. Instead of wading back in for another comment we'll just cut and paste a few emails. The range of opinion is diverse.
There are good arguments on either side though we tend to the view that there would be an economic distortion and the money would be better deployed in a productive capacity in corporations rather than banks.
Initials have been replaced names for privacy reasons. Small modifications have been made to cut out remarks like "there you go bashing the banks again'' and "love yer work''.
Hi Michael
The bigger issue is the tax system in Australia - that's really at the root of the skewed investment landscape you're describing in your article.
In Hong Kong there's no tax on interest from bank deposits (a 100% deposit guarantee was introduced around the same time that Mr Rudd introduced it in Oz - but for some reason there was no non-bank backlash here), no tax on dividends from shares, not capital gains tax and no GST.
Could anyone seriously argue that Hong Kong doesn't have an extremely efficient, world-class IPO and investor-friendly stock exchange?
Rather than criticizing the Aussie tax system, you seem to be attacking the banks for wanting less tax. While I'm no fan of the banks, wouldn't it be better for consumers to pay less tax?
Reminds me of wanting a chip on both shoulders to balance things out, rather than getting rid of the first chip.
Cheers
P
Hi Michael,
This distortion of asset classes is a complete disaster for the investment community who in this semi-free market economy actually drive non-government investment in real assets which produce real jobs. It is a scandal what the bank lobby get away with. Ultimately the Labor government is going to be cornered into threatening the banks with severe regulation to force them to pass on interest rate movements to borrowers. This kind of government intervention will ruin the banking sector from an international perspective, while having the double whammy of a flight-to-guaranteed accounts and a hopeless lack of investment in the real economy. Inflation will eat away at the funny money in the banking sector so that no actual real growth occurs. When people realise this, where will they go when the government talks down the economy and the only "safe" investment is in banks which do not add value to the economy when banks are hoarding cash and interest margins?
Regards,
H
Hi Michael,
Thank you or your article today about tax deductibility for investment income - while I agree with your opinion on the likely consequences of full implementation of this proposal; we need to ensure "we do not throw the baby out with the bathwater."
I am a currently unemployed single person and do not qualify for any benefit payments because I earn "sufficient income" {$20K p.a.] from a modest inheritance which I self-manage. I will not receive any benefits from the recently announced"recovery package". I currently hold the majority of my investment in cash having foreseen the current crisis two years ago as a result of having the experience of observing the economic cycle from the 1961 "credit squeeze" to the present.
There is an inherent flaw in our taxation system regarding interest income compared to other forms of income derived from capital in that assets other than cash receive the benefit of depreciation allowances to reflect their decline in value as well as GST credits if sold at less than their cost base which can be offset against future CGT liabilities.
In the case of investment income, there are no deductions available to reflect the decline in value of the cash invested due to inflation let alone a CGT benefit if the cash is rolled-over into another form of investment. At the present time, the net interest rate on interest income is probably less than zero as the current RBA cash rate is close to or exceeds the true rate of domestic inflation rather than the contrived index used by the government [refer the recent article on this topic in the Fairfax media].
I agree there is no valid argument for giving blanket tax deductibility for investment income due to the market distortions that would be created however I believe there is a strong case for "levelling the playing field" for interest income from cash deposits by allowing deductions equivalent to the effective depreciation of the cash amount due to inflation to match deductions applicable to other forms of investment.
I believe there are a lot of self-funded retirees as well who would support this proposal.
Kind Regards
D
Dear Michael,
While I agree that having uncapped tax deductibility on bank interest would be extremely harmful to the economy overall, I think that having tax deductibility on bank interest would be extremely beneficial to the economy overall, and for families in particular.
With bank fees, government charges and a host of other hindrances in place that affect the average individual or family savings account, there is little incentive for people to bank their money. Most of us live a day-to-day existence already, with those that can find a few bob to put away each day hit again by the taxman on what very little interest they earn.
Helping individuals and families (only) to save up for a rainy day (and for what should be a compulsory 20% deposit on a home), there needs to be more incentive to use the old-fashioned savings account.
The Government should allow, nay, encourage, individuals and families to save their already-taxed income by disregarding as income the first $2500-$5000 of interest earned annually (making it tax deductible).
Setting a level high enough to cover most families needs, yet low enough not to interfere with the wider investment market, as you have pointed out, is essential. Most individual or family circumstances would be catered for at the lower level ($2500), enabling people to have up to $30,000 in a bank account earning 7.5% interest. A $5000 limit will allow people to have up to $70,000 in the bank earning 7%.
Of course, most individuals and/or families will not have anywhere near this amount of money to invest, but investment is not really the point. It is about encouraging savings - helping people to overcome their dependency on credit and get true value for their savings dollar.
While these larger amounts may impact on some other investment options, such as shares, managed funds, etc, restricting the tax deductibility to individuals and families will not interfere with institutional investment - by far the bulk of investment dollars.
Investors aren't going to baulk at other investment options as bank interest rates are rarely this high and the limits imposed would allow only a small fraction of the investment dollar to be diverted to savings accounts.
The banks are merely being greedy at the moment, trying to get money for nothing. However, the suggestion of tax deductibility for personal savings should be progressed. If the Government can do something that would increase the overall savings of this country, and at the same time benefit the 'people' rather than the banks, this would surely be in the best interests of the country as a whole.
Maybe you can pursue the thought more fully for the community benefit rather than dismiss the idea due to the obvious greed of the banks
Regards,
N
Hi Michael
I was not aware that this was back on the agenda. I thought it was only being pushed by the eternal bridesmaid at the NAB.
Any efforts to divert capital from productive enterprise to bank deposits (money lending) will not only impair equity prices, but will impair investment in our economy and prolong any down turn (imagine the flight of capital from overseas investors) - it amazes me that the Bankers don't see this as a major risk to their own exposure to corporate lending and potential for the future growth of their loan books.
Successive Australian Governments have done enough damage to our earning capacity by encouraging investment in consumable depreciating assets such as Housing which is now coming home to roost!
Who really are the smartest guys in the room? They are few and far between.
Kind regards
J
Hi Michael
I have always read your articles with keen interest. Your recent one relates to the folly of making bank interest tax-free. Well, think a bit more about this topic. Other countries, I believe, already have this system where interest is not taxed e.g. Malaysia, Singapore etc - and their stock markets are functioning pretty well. People in these countries also still invest in the property sector too.
My opinion is that in a capitalist society, there will always be people who take greater risks than others. It is reasonable to assume that not everyone will stick their money in the bank. To some people, the idea of capital growth outweighing bank interest is very compelling. If other countries can work with this system, why can't we?
There comes a time, however, that as people grow older (e.g. retirees), they are not so inclined or become incapable of looking after their share portfolios, in which case, wouldn't tax-free bank interest be the way to go?
This is not intended as a criticism of your article - it's just a different look at things.
Regards & Have a Nice day
M
G'day Michael,
I read with interest your column today and agree with you that it is an issue that should be debated more thoroughly.
However I do not get your point that a tax break on savings would distort the market.
Such schemes exist in the UK, France, the Netherlands and soon to be introduced in Canada.
In all cases there is a cap on how much you can save without paying tax on the interest earned. There has been no market distortion or notable impact on equity markets in those countries.
This is not a new idea. It has been done before and the impact has been measured.
As you would know Australians receive tax breaks for investing in shares, in property and an enormous range of other areas. About the only area of investing that does not receive any incentive is savings.
As you would also know Australia has a significant gap between the savings pool and the mortgage/loans portfolio. As a result Australia relies on funding from overseas. This reliance on international wholesale markets (due to the lack of local savings) is one of the reasons why banks have been unable to pass on the full RBA rate cuts.
Any incentive to increase the amount of savings in Australia must be a good thing.
Michael.....this is a brief "off the cuff" response and certainly not meant for publication.
Regards
D
Dear Michael
Whilst on the surface what you say about how the poor stock market would suffer and business could struggle to raise finance sounds plausible I think that you are missing something else. The money which depositors stick in the bank and accept a low return on has had the ticket clipped umpteen times already by the taxman.
Just look at how hard it is these days with a multitude of taxes biting every time a dollar moves. We even have a tax on a tax when it comes to petrol.
For those who want to play the market let them accept the risks. Small business people like me work very hard and we look for somewhere safe to keep those hard earned funds in order to protect our kids and not be a burden to the state. When we get a little interest from this we deserve every cent and not have a greedy state help itself to yet more of it.
Frankly I see no reason why my bucks should go towards the greedy big end of town where CEOs earn more in a day than lots of us do in a year. Screw them and their bloody risky ventures. Guys like me earning less than $140K a year by working 80 hour weeks, educating a couple of future tax payers get taxed at the top rate the same as those pricks ``earning'' millions. If our business fails we get no helping hand from anyone.
So stuff your sentiments and let the lower end of town have a little win for a change. There has not been much for a long time.
I know its safe in the CBA even without the government guarantee.
What irks me is that because I have played it safe and deposited my money for many years after the government has clipped the ticket on the way to earning it that it would be nice to have at least some of the interest coming in tax free. I feel that I have paid enough tax in my life time and don't want to see that tax pissed against the wall in helping the government shovel more money at big business when its little guys like me who have been paying the bulk of the tax for years.
We cannot afford the fancy lawyers and accountants to get around it like the big end of town and so a little win for us would be nice.
Cheers
W
re attempted bank robbery
hmm, very amusing.
I am a great believer in "the truth is somewhere in the middle" - with economics at least.
Could you not equally write a story from the opposite point of view.
The sharemarket is infested with casino swindlers of every ilk.
The long term investor is simply being milked or rather bled.
Every man and his dog is sitting all day "pumping" their shares, instead of doing some productive work.
Do they pay tax on all these transactions? Somehow I doubt it.
Meanwhile the bank interest investor has their capital shrink by at least the rate of inflation.
The 5% or so they do nett, does not keep up with other assets.
This forces all the money into housing.
The so called housing shortage should really be called a "hogging" phenomenon.
Think of places like Collingwood 100 years ago - back then the population would have been triple.
(Now it's just a carpark full of DINKs).
Now, if all the money was in bank accounts, like it used to be ...
The government could open a bank called, let's say, Commonwealth bank.
Companies would be free to borrow from the bank at fixed rates.
Retirees could buy bonds.
A sizeable part of the entire system would be ... GASP ... regulated!
Because of inflation creep, bank interest should be tax free.
(Especially when interest rates are low, and they should always be low.
As the only blunt instrument of the RBA it lets the government off the hook, which is wrong.
The government should target measures as required.
Capping the primary residence to, say, $1m would be one easy example of a pro-sharemarket intervention.
Adding GST to share trades would be another example, of sharemarket stabilisation.
I don't necessarily advocate these examples...)
There is no ATO imperative to account for interest, the banks have all the stats.
Banks should also be given government deposit guarantees as a matter of course.
The government is collecting this 3-5% creep, so they should do something for it.
If the banks face even more regulation to get the guarantee, so be it.
I agree with economic liberalism in theory except it doesn't work.
In practice, humanity will always instinctively try to subvert the system.
It's a survival strategy! Formed by evolution!
The finance system now is like a dog overrun with fleas and parasites.
A dog can function with a few fleas. This dog is getting sucked dry.
People talk about saving the financial system (the dog).
But they are actually describing the fleas, or else the combination of the dog and fleas.
I expect there would be more funds available for the sharemarket if people didn't anticipate being ripped off.
I think the US directors bailout golf club party has done more damage to the US sharemarket than any other single media event.
It may have added a significant lift to Obama.
In future, I will invest in only a very few companies which I personally like (including my own).
The rest of the money, I will take overseas and piss it away.
Cheers
A
Westie,
just because the banks would like it doesn't mean it's completely without merit.
I've got a house deposit quietly sitting, struggling to keep up with inflation (and I'm not even on the top marginal tax rate). Obviously I'm a fool for such old-fashioned behavior and deserve to be punished. I really should have been running with the pack, taking stupid risks and bidding up the price of supply-constrained assets. Better still, I should have geared up with foreigners' money to really get the economy humming.
Wasn't that what got us into this mess in the first place? Didn't our foreign debts come about because the capital couldn't be raised locally? I thought you'd moved beyond talking up house prices and the stock market as being Good Things in their own right.
Ultimately, what difference does it make that the money is invested by my bank manager as opposed to by myself, or by my ticket-clipping fund manager (recent guarantee aside)?
Regards,
A
Hi Michael,
Nice article on the request by banks for tax exemption on interest. You make some relevant points, which by and large, I concur, however, I have long thought about the taxing of interest paid by banks.
Interest, at this stage of the economy is higher than inflation, however, quite often, it is equal to or below, especially in the case of everyday accounts. To me, it would make more sense to tax the interest gain ABOVE the average inflation for the year ending June 30. Otherwise, the tax is, by an large, on a loss! Sure, the bank fees and charges may be tax deductible, however, the reality is that $10,000 earning 6% interest comes to approx $600, of which $450 is merely keeping in line with inflation, hence, the income component should be considered that above, in this example, that would be $150. By all means, tax that component, but not the whole lot. Otherwise, the savings really are not savings at all, as the money, in real terms is barely, if at all, keeping up with inflation.
R
