Here’s an idea to reignite competition in the mortgage market and get credit flowing again, but will the Federal Government consider it?
BY STUART WEMYSS
The Federal Government touted its Budget announcement in relation to the proposed 50 per cent discount on interest income of up to $1000 (to save personal income tax for investors) as a mechanism to assist the banks with funding mortgages. It will revive competition, it said. The thinking is that people will be encouraged to save more money if they won’t get taxed as much. The benefit to the banks is that an increase in bank deposits will ease the funding pressures as they won’t have to borrow as much from expensive overseas money markets. Banking deposits is one of the cheapest forms of funding at the moment.
A person on the most common tax bracket (31.5%) would normally pay $315 in tax on $1,000 of interest earnings. However, thanks to this proposed initiative, they’ll save $157.50 in tax. However, they have to have approximately $20,000 of savings (@ 5%) to obtain this level of benefits. It isn’t easy to save this amount of money from after-tax income for people earning $30,000 to $75,000 (which is what 55% of taxpayers earn).
It’s a joke to think that this proposed initiative will result in promoting “additional” savings. It’s certainly not going to reignite competition in the banking industry.
Promoting a savings pattern is a good thing. Too many people spend all their income and don’t save for a rainy day – particularly lower income earners. A much better initiative would be to allow a tax-free threshold on interest income of, say, $250 for each individual with taxable income of $100,000 or less (or family income of $150,000 or less). This would allow taxpayers to accumulate approximately $5000 of cash savings before needing to pay any tax on the interest ($5000 @ 5% = $250). Often, it’s more difficult for lower income earners to save money. Therefore, the government’s efforts should be directed at low to medium income earners to encourage good financial disciplines.
Will this save the banking industry? It’s probably not enough. To maximise this initiative the government should only offer the tax-free interest income threshold if the interest is received from a financial institution other than one of the Big Four banks. This will direct all “additional” cash deposits into the second tier banking sector and allow these lenders to (once again) compete with the bigger players.
How much would this initiative cost the government? I’m not a Treasury expert but I would guess people earning less than $100,000 probably don’t hold a lot of savings (as a proportion of total savings). Therefore, if the initiative doesn’t promote people to save then it probably won’t cost that much. However, if it does change people’s savings habits then the banking sector will improve (competition) and we’ll become a wealthier nation so the cost is well worthwhile – more so than other failed government initiatives.
The government is a beneficiary of the lack of banking competition as the banks are making record profits and therefore paying record taxes. Maybe this is discouraging the government from taking any action.
Does the government or opposition have the fortitude to adopt such a bold initiative as I’ve proposed here?
Stuart Wemyss is a qualified financial planner, chartered accountant, mortgage broker and founder of financial advisory firm ProSolution Private Clients. Stuart is the author of the Smart Borrowers Handbook and The Property Puzzle (available at www.businessmall.com.au). He can be contacted at www.prosolution.com.au