Fancy a discount on your taxable income?

Fancy a discount on your taxable income?

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 ( 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.

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Learn more about savings accounts

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.