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50% discount on interest

Everyone remembers the raging debate that unfolded after the federal government announced its plan to introduce a new resource rent tax in May last year. But what many don’t remember is that one of the accompanying components of that reform package was the commitment to introduce a 50% discount on interest earnings – something that many of us have been urging the government to do for a long time.


The structure of our current tax system delivers advantages for investors who direct their savings into real property or shares, often entitling them to offset any losses generated against other assessable income. Additionally, capital gains on an investment property or shares can be discounted by up to 50%, which serves as a significant tax incentive for investors when they are deciding where to direct their funds.


The same incentive does not currently exist for investors who choose to hold their funds in an interest-bearing account with a financial institution, or even in a debenture, bond or annuity product.
From a tax policy perspective, this inconsistency is a flaw in the structure of our tax system, highlighted in the Future Tax System review.


In response to the review, the government plans to introduce a 50% discount on interest income up to $500 for the 2012-13 year, rising to $1000 in the 2013-14 financial year.
 

This is a good policy proposal that allows for a slightly more balanced tax system where appropriate incentives exist for all major investment classes. In the future, when budget conditions permit, we should look to do away with the upper limit on the interest income discount.