Government to end savings tax drag?

Government to end savings tax drag?

Savings accounts may become a much more attractive place to keep money as a result of the Federal Government’s current tax review, reports Jackie Pearson.

October 14, 2009

Tax and inflation are the traditional enemies of any serious saver. According to Treasury Secretary Ken Henry the effective tax rate (taking inflation into account) on bank deposits for a middle income earner is around 50 percent. That means for every $100 you earn in interest, $50 will disappear as tax.

That’s an excellent reason for making sure you shop around to find the most competitive savings account, with no fees and paying the highest possible interest rate. And there could also be some good news on the horizon as a result of the current Henry Tax Review.

Reward for safety
“We are excited that Mr Henry has confirmed that this review is trying to find a more efficient and fairer balance in the taxation of savings,” says Louise Petschler, CEO of Abacus, the organisation representing mutual credit unions and building societies.

“Deposit accounts in … banks, building societies and credit unions are the simplest, safest, most accessible and best understood savings vehicle yet they bear the heaviest tax burden,” she says.

Although much riskier than savings accounts or term deposits, shares and property investment are currently taxed at lower rates than bank deposits and Petschler is hopeful this anomaly will be addressed as a result of the current tax review.

The advantages of change
Abacus is arguing that lower levels of tax on savings accounts and term deposits could also have the following advantages:

  1. Make it easier to save a deposit for a home and so improve Australia’s overall home loan affordability,
  2. Help savers with relatively lower levels of wealth and income to build up their savings buffer, and
  3. Improve Australia’s overall levels of household savings so we can better cope with our ageing population.

Meanwhile, shop around
It is still several months before the outcomes of the Henry Review will be announced and transforming the recommendations into law could realistically take years.

That gives savers plenty of time to keep shopping around for the most competitive deals for their savings. Of the 367 accounts currently listed on RateCity, many pay no interest at all, even on a $20,000 deposit. However, one of the best accounts return up to 5.21 percent p.a . Comparing savings accounts is the only way to ensure you keep ahead of inflation and tax and achieve your savings goals.

 

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Learn more about 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.

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

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.

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. 

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 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.

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.

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 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.

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.

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 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.

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 direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.