Quick comments & quizzes

Quick comment: should there be differences in the way savings are taxed?

29 May 2015

In Australia, the amount of tax an average income earner pays on their savings will depend on the type of vehicle, ie bank account, own home, investment property, that they choose to use to hold their savings. Do you think these differences should exist?

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16 thoughts on “Quick comment: should there be differences in the way savings are taxed?”

  1. Vic says:

    This “Quick Comment” question (I feel) is poorly worded. Any savings that an “average income earner” makes in any one period of time (ie an income year) is that what remains after income and other taxes and various levies have been deducted beforehand and expenditure incurred for personal-private consumption and obligations. I am not aware that Australia taxes savings per se (except on residential housing and in the form of rates and levies), but I am aware that Australia has taxes on certain gains made from “savings” per se. Therefore, I feel that this question should read inter alia, “Should there be different tax rates and treatment on gains derived from savings that have been accumulated by the “average income earner”?”.

    My answer is “NO” except for owner occupied residence, [as an idealist]; and for the reason stated in the next paragraph.

    Putting aside the issue of risk to return of the investment [savings] issue, the actual rate of tax from a gain from a past saving is determined by the amount derived in the relevant income tax year and the applicable marginal tax rate of the “average income earner”. So, for example if a person puts all of their savings in one investment vehicle/product but does not sell (or receive any form of income from) this investment for several income tax years, then that person is invariably better off than a person who receives a gain from his investment at the end of each income tax year (such as interest from bank accounts, term deposits, debentures, etc and in the form of dividends and rent). This apparent phenomenon is due to the compounding effect of the amount that is not taxed annually and secondly, to the capital gains tax provisions.

    However, a more common sense answer from me, is “YES”; and for the following reasons.

    No modern government (especially an Australian one) will legislate with respect to the “average income earner”, a uniform tax rate on gains derived from savings-investments. Governments at times want to stimulate the economy and at other times, want to retard growth in certain parts of the economy. So they use taxes rates and anti-tax measures (in the form of exemptions and deductions like the recent, immediate $20,000 deduction for purchase of a depreciable item by a small business) to manage the growth of the economy.

    Anyway; who is an “average income earner”? Is it a person who is an employee or a self-employed business person, a sole proprietor, solely a landlord or just a passive investor? Each of these “average income earners” may report the same taxable income but the source of their income is different. The proportion of gain from their savings-investment to their taxable income does vary widely due to their relevant earning activities. So it would be quite discriminatory to have a uniform tax rate on such gains and applying to every individual taxpayer irrespective of their overall earning activity, because some would bear a heavier income tax liability while others will enjoy relief.

    Therefore, I feel that this “quick comment” question should not be included in any further and in the current tax discussion programme.

     1 Like
  2. Chris says:

    Tax on savings should be the same. There should be some form of tax on the family home capital gain. I think the USA have tax above a certain value. Housing in cities is so expensive, all discretionary income is being sucked up. A $560k house selling 2 years later for $960k. And there’s no bubble. Yeah right APRA.

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  3. Peter says:

    I have never found that savings area good road to long term prosperity.
    Not borrowing for non appreciating assets is a far better path.
    Investing is a better word, saving is only a small part of investing in liquidity where needed.
    Encouraging investment as a far better objective, educating Australians to invest is a far better proposition. The long term effects are less reliance on government support especially for retiree income resulting in less demand for government funding.
    The best example can be set by governments showing long term financial responsibility in conducting its own financial affairs.

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  4. Albert Anderson JP says:

    Why has a tax system got to be so greedy as to tax the limited taxpayers able to pay tax over & over again?
    Income tax + GST + CGT + tax on savings + + + etc. all from the same cow ! Sooner or later that cow is going to dry up.

    Savings are just that,,, savings.
    That can only happen AFTER the taxman & everyone else has had their hand in your pocket and after you have put food on the table.

    Savings are a hard won result of hard work & good budgetary discipline (unlike government entities) and are not easy to achieve.
    As such, there should be NO TAX on savings of any kind.

     2 Like
  5. Tim says:

    I get irritated when proposals are made to favour one area of economic activity or the other. Yes, under our tax system, savings are discriminated against, and traditionally people complain about insufficient savings, and want more. But more savings are not necessarily an unmitigated benefit.

    For example in the US at present there is TOO MUCH savings. The same in China. But in the US the excessive savings situation is leading to deflation, which many, including the Fed, regard with horror, and is actively trying to prevent.

    What is needed is a completely ‘neutral’ tax system, leading to not too much savings, and not too little. A ‘Goldilocks’ situation. Yes neutral tax systems do exist. Ask around.

     3 Like
  6. Ralf says:

    All forms of savings return should at least allow for inflation. The interest income on savings should be real. Similarly its incorrect to refer to the CGT discount as a tax loop hole, as it often is, the 50% discount was implemented in place of the CPI indexation in place originally. Also, where CGT results in a lumpy gain in a given year and pushes the marginal tax rate into the next bracket, that is also unfairly taxing the gain. Combining the tax bracket creep and CPI, the 50% discount is right for all but those already in higher tax brackets. The return should be annualized and tax paid accordingly. eg 10 yrs gain: Tax paid = (Tax on 1/10 gain) x 10. then there is the issue of unused losses, you should be able to offset a capital loss against income not just an in specie gain.

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  7. Michael Evans says:

    Perhaps the debate ought to be focused on the taxation of consumption expenditure! Savings are merely deferred consumption, so savings are taxed when they are spent. As such (if we taxed all of HFCE) there would be a flat rate of 10% on savings – but the tax system would not affect the inter-temporal consumption decision – this is a good thing.
    But, if the tax on consumption expenditure is to be demeaned to the extent of the “tampon tax”, then lets get rid of GST altogether.
    Then we can have a flat tax of 4.9% (10% of the proportion of consumption that we actually tax) imposed by the States on ALL taxable income and gains – and a decrease in welfare support by the same amount – to reflect the net increase in disposable income arising from the decrease in prices.
    The flat tax could be collected on investment income and salary by way of a withholding.

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  8. peter davidson says:

    There are too many inconsistencies between tax treatment of capital gains, interest, dividends and rent. These inconsistencies bias investment towards speculation in asset values, especially, in the Australian context, in housing for investment.
    Lower capital gains tax rates in 1999 were supposed to promote innovative investment in ICT. Instead they fed another housing price boom.

     2 Like
  9. John H. Kelmar says:

    There should be NO TAX on savings.

    Savings have resulted from earnings, which have already been taxed, so a further tax on savings means that this money is being taxed twice.

     1 Like
  10. David Ireland says:

    Tax on savings interest is really a tax on profits. Once an institution has taken its profit margin the money left is used for growth and to pay depositors interest. At the very least, there should not be tax on the proportion of interest earnings that only matches the rate of inflation, otherwise the tax at times of low interest rates ensures a negative return on capital and thus provides a huge disincentive to save.

    Capital gains tax should always take into account the inflation rate but it should take into account building costs and quality improvements. Land tax can cause structural change that does not provide good community outcomes, think the example of a well located home on a good allotment occupied by pensioners. It is one thing to tax on the demise of our ageing members of society but wholly abhorrent to use high asset taxes until both parties exit life.

    Bring back Federal death duties on estates once both partners are deceased, especially bring death duties in on superannuation once both partners have passed on. Eliminate the practice of leaving estates in trust via binding death benefits which is designed to minimise tax on estate capital gains and incomes.

    Cheers David Ireland

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  11. Rob says:

    I believe it is in the national interest to encourage people to save both generally for the economy and in super for one’s retirement years. My preference would be for all interest to be tax free but perhaps this would be difficult, especially when interest rates are high, so would recommend a high cap except in super. It is so difficult to accumulate enough super to retire that interest earned in super should be tax free.

     1 Like
  12. Dave Brubeck says:

    You guys know that these differences probably wouldn’t exist if taxation was on gross revenue and total capital growth, rather than income, right? Allowing for deductions and capital growth that never actually gets realised also probably costs the government a fortune.

    There’s probably something in there for you.

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  13. Warwick Smith says:

    Tax on savings should not differ across vehicles per se but different types of income derived from savings deserve different treatment.

    Economic rent (unearned income) should be highly taxed and that includes taxing land value. Increasing annual land taxes to include the family home would be appropriate because the economic benefit from owning a home should be largely derived from the use-value plus the relief from paying rent on somebody else’s property; not by the expectation of unearned income through land value increases.

    Capital gains on land are almost never the product of the owner’s efforts but are a result of community and government activity. As such they should be largely returned to the community through taxation.

    There are good arguments for retaining capital gains tax exemptions for the family home (in addition to increasing annual land taxes and the abolition of stamp duties) because such taxes can be a barrier to transactions which in turn lead to inefficient use of the housing stock.

    Capital gains tax exemptions and negative gearing should be abolished for investment properties as they distort the savings and investment market, making real estate artificially attractive and driving up prices.

     5 Like
  14. Karupuh Naiyeh says:

    There should only be 2 rates of tax on savings, 0% on the family home and a single rate for everything else.

    Just make the change for savings made from the announcement date and it would be easy to change.

    It will help first home buyers because their deposits will be taxed less so will grow quicker and there would be less property investors in the market because they would invest in other vehicles.

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  15. Jason says:

    Yes there should be differences. Yield and capital growth are different as one has risk. There should be an incentive to take risk.

     1 Like
  16. Daryl Ross says:

    Income derived from personal savings invested in commercial enterprises including bank or other interest , should be taxed as income unless those savings are held in a superannuation fund in which case they are taxed as super contributions.

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