Saving money may soon become easier if a proposed Federal tax incentive gets the green light. It’s a timely initiative for Australians, which are saving more of their income now than in the past 24 years, according to Australian Bureau of Statistics figures.
How the tax break would work
The government is proposing a 50 percent tax discount on income earned from interest on cash investments in authorised deposit taking institutions such as banks, building societies and credit unions. So saving money in an online savings account or term deposit as well as interest earned from bonds, debentures and annuity products would be less heavily taxed under the proposed plan.
The proposed tax discount will be capped at the first $500 of net interest earned from July 1 next year and will increase to the first $1,000 of net interest earned from July 1, 2013.
So if you earn $1,000 next financial year you’ll only pay tax on half of the interest earned up to $500. That means you’ll pay no tax on the first $250 of interest you earn but will be taxed on the remaining $750 interest income.
Earn $1,000 interest in the following year and you’ll only pay tax on $500 earned – the first $500 interest will be tax-free earnings. Currently, every dollar of interest income is taxed at your marginal tax rate.
The proposed tax break is not means tested and should it go ahead all Australians will be eligible to receive the savings incentive.
Why we need it
The ABS says Australians increased their savings in the first quarter of 2011, with a savings ratio of 11.5 percent. But RateCity chief executive Damian Smith says we need greater incentive to put more money away.
“There is a huge disparity in Australia between average saving levels and the financial difficulty faced by too many individuals. Making it easier and more rewarding to save even small amounts will help close this gap,” he said.
Research results from CoreData revealed that one quarter of Australians are dipping into their savings or increasing debt to cover higher living expenses and the situation is expected to worsen.
“The government’s plan to introduce a new savings incentive next year will hopefully encourage more Australians to add a bit more to their savings accounts, knowing that they’ll pay less tax on the interest than before,” he said.
A discussion paper on the proposed scheme is open for public comment until August 5.
How to cash in
While the proposed tax discount is still on the table for discussion, Smith says it’s likely that the legislation will be passed. So Australians are being urged to get plan ahead to make the most of their savings should the scheme get the go ahead. Here’s how:
- Create a budget to work out how much disposable income you can comfortably save – the government’s Money Smart website (www.MoneySmart.gov.au) has a simple and effective budget tool
- Start comparing various savings option online to determine the most suitable savings account for your circumstances, such as a high interest savings account or term deposit account
- Opt for a savings account that requires a minimum regular deposit to achieve the maximum rate of interest, so you have an incentive to contribute frequently
- Set up automated deposits into your account shortly after your pay is deposited so you save without having to think about it.