When I look at all the options to earn an income in Australia, it seems that interest income is probably the least tax effective way to do this - as bad as PAYG
What with the halving of the capital gains tax, negative gearing, franking credits, earning interest is really not attractive.
I was thinking maybe a way to make it a bit better, and it might help to increase the local savings rate, is to have franking credits for interest earned. To pay for this the franking credits would not be able to be passed on with dividends. I'm not sure how much franking credit could be added. Suppose it would depend on the interest margin for the company. It might mean lower interest rates depending on the level of competition for funding, but this would increase profits and company tax payable, so revenue neutral.
A 10% franking credit on TDs would start to make them more attractive, especially for SMSFs. In a way, it is people who lend money to the banks that are more important that the share investors, unless they're funding a capital raising.
I know the Govt is going to reduce the tax on interest income by a small amount from July 1 this year, but this comes at a cost to Govt revenue. What I'm suggesting is revenue neutral and could be applied to bank issued and corporate debt. It would probably allow a lot more locally sourced funding. Not sure how big an impact it would have on bank shares, but I'd argue it would be minimal. They'll still be paying a good yield even with reduced franking credits.
What do others think?