How to make earning interest a better option

sydboy007 · 10 February 2013

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?

medicowallet · 10 February 2013

I think it is a poor idea. I cannot see any sense in the proposition at all

If you want to share in the profits, buy the shares.

ie why should a shareholder pay double the tax (via loss of franking) so that the customer gets more money.... hang on, I expect to see this as Labor policy any day now.

Cash is an excellent investment at certain times, and recently outperformed shares for many years.

If you want to milk a stupid investment vehicle, why not have people pay more for investment home loans?

MW

craft · 10 February 2013

sydboy007 said:
I know the Govt is going to reduce the tax on interest income by a small amount from July 1 this year

I thought after being delayed a couple of times this had now been totally scrapped.

McLovin · 10 February 2013

How you can have franking credits attached to income that has not yet been taxed?

tech/a · 10 February 2013

Govts have to get serious and should have been more serious
In super investment.
In a few short years baby boomers will be in for a bigger shock than those now who can't exist on
The pension today.
There just won't be the funds to cover an exploding deficit let alone fund
Pensions/Medicare/Social Security.

So the best way to make earning interest on funds is no tax at all.
Now lets see that as a platform!

white_goodman · 10 February 2013

McLovin said:
How you can have franking credits attached to income that has not yet been taxed?

+1

ding ding ding

creative thinking though

white_goodman · 10 February 2013

tech/a said:
So the best way to make earning interest on funds is no tax at all.
Now lets see that as a platform!

+1

arguably smooth out the business cycle and strangle some govt revenue

sydboy007 · 10 February 2013

medicowallet said:
I think it is a poor idea. I cannot see any sense in the proposition at all

If you want to share in the profits, buy the shares.

ie why should a shareholder pay double the tax (via loss of franking) so that the customer gets more money.... hang on, I expect to see this as Labor policy any day now.

Cash is an excellent investment at certain times, and recently outperformed shares for many years.

If you want to milk a stupid investment vehicle, why not have people pay more for investment home loans?

MW

I'd argue a bank has a pretty good idea of how much tax it's going to pay.

Some of the bank Hybrids already pay franking credits, so this idea isn't too much different.

I just think this country has way too much of a shares culture, and part of that reason is that interest income is quite a poor way to earn an income. The current tax system is biased towards speculation and asset appreciation. You only have to look at the fact that residential investment properties have on net lost money every year since the halving of the capital gains tax.

As I said before, the use of franking credits with interest payments probably wouldn't have a big impact on dividend income as it would probably allow for slightly lower interest rates to be paid, or during times of stress when rates start to get quite high, then using up excess franking credits could come in handy for some companies.

medicowallet · 10 February 2013

sydboy007 said:
I'd argue a bank has a pretty good idea of how much tax it's going to pay.

Some of the bank Hybrids already pay franking credits, so this idea isn't too much different.

I just think this country has way too much of a shares culture, and part of that reason is that interest income is quite a poor way to earn an income. The current tax system is biased towards speculation and asset appreciation. You only have to look at the fact that residential investment properties have on net lost money every year since the halving of the capital gains tax.

As I said before, the use of franking credits with interest payments probably wouldn't have a big impact on dividend income as it would probably allow for slightly lower interest rates to be paid, or during times of stress when rates start to get quite high, then using up excess franking credits could come in handy for some companies.

I have no problem with the government trying to make cash a more attractive option, heck a managed deleveraging would be great.

But the problem is that the suggestion above is not the solution, and I think most people would know that deleveraging has already occurred for mum and dad share investors, just not for property investors.

MW

FlyingFox · 10 February 2013

craft said:
I thought after being delayed a couple of times this had now been totally scrapped.

Unfortunately I am pretty sure it has.

McLovin said:
How you can have franking credits attached to income that has not yet been taxed?

+1.

sydboy007 said:
Some of the bank Hybrids already pay franking credits, so this idea isn't too much different.

Hybrids aren't like deposits nor is their associated risk. I might be wrong but hybrids were not covered by the gov deposit guarantee.

sydboy007 said:
I just think this country has way too much of a shares culture, and part of that reason is that interest income is quite a poor way to earn an income. The current tax system is biased towards speculation and asset appreciation. You only have to look at the fact that residential investment properties have on net lost money every year since the halving of the capital gains tax.

My theory is that this is done to create growth, well paper growth atleast. The only fair way that I can think of fixing this is to have no concessions e.g CGT etc and price money appropriately i.e no 0-2% interest rates.

sydboy007 said:
As I said before, the use of franking credits with interest payments probably wouldn't have a big impact on dividend income as it would probably allow for slightly lower interest rates to be paid, or during times of stress when rates start to get quite high, then using up excess franking credits could come in handy for some companies.

Again you shouldn't be allowed to give franking credits for something that you haven't paid tax on. The reason you have franking credit with dividends is that the company has already paid tax on it at 30%.

FlyingFox · 10 February 2013

medicowallet said:
I have no problem with the government trying to make cash a more attractive option, heck a managed deleveraging would be great.

Ofcourse we all know this will not happen. Would like to see a government try though. Would be interesting to see what the next recession we had to have speech would be like....

McLovin · 10 February 2013

sydboy007 said:
Some of the bank Hybrids already pay franking credits, so this idea isn't too much different.

Hybrids are hybrids. They're equity sold as "debt" because there are enough people who want to buy them and it lowers the cost of equity funding for the issuer. Bank interest is nothing like hybrids, it is a real debt obligation. Bank bonds are a better comparison and just like deposit accounts have no special tax advantage.

I just think this country has way too much of a shares culture, and part of that reason is that interest income is quite a poor way to earn an income. The current tax system is biased towards speculation and asset appreciation. You only have to look at the fact that residential investment properties have on net lost money every year since the halving of the capital gains tax.

There's a love hate relationship in Australia toward equities, it's sort of perverse. On the one hand Joe Average will consider the sharemarket gambling and won't put any money near it. On the other hand Joe Average probably has nearly all his super in equities.

Macquack · 10 February 2013

Good stuff, McLovin.

Are you an accountant?

Vixs · 12 February 2013

What possible interest does the government have in making cash a more tax effective investment vehicle?

On the broad economy side, savings levels are soaring, and so are levels of debt repayment. The economy is struggling with the lack of turnover in retail and tourism as a result of this saving - they are dropping interest rates to encourage spending.

On the investment side, it's a crap investment option.

It's a small part of portfolio allocations used to smooth out the rougher and more volatile returns on equities - it dulls the good years and pretties up the bad ones. It is where you keep your money when you don't know where to keep your money, or when you'll need it in the next 5 or so years.

You don't get wealthy by putting cash in the bank, you just get more cash in the bank.

The government needs people to achieve capital growth in their super to allow a self-funded retirement that is not dependent on the pension.

They want and need us invested in global and domestic equities, corporate bonds, government bonds, infrastructure, residential direct property, commercial indirect property - while the more defensive options don't have an element of capital growth, a portfolio incorporating the above does, and should have smoother returns year after year. Specialisation or focus might bring higher returns but it will also risk bigger losses.

On an economic level, they want us to spend and spend and borrow and borrow. On a future investment level, they don't want to see a dollar more in cash than the banks need to provide liquidity. On a policy level, they don't want us getting a reduction in taxes, it hits the hip pocket when it's already hurting.

I don't really understand the logic - cash is an unattractive investment asset class and always will be over the long term, as it produces nothing but more cash on the banks balance sheet to allow more lending.

doctorj · 12 February 2013

I don't understand the desire to make government insured risk free bank accounts earn an even higher rate of interest. Aussie interest rates are already so much higher than the rest of the developed world.

Arguments about taking a balanced approach to risk aside, it's healthy for a country to have a capital base that is willing to take risk. We already have so much of our capital base tied up in unproductive property, why promote any more of it than necessary going to banks?!

drsmith · 12 February 2013

sydboy007 said:
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.

That to me would only make the tax system even more complex than it all ready is as it is only treating the symptoms and not the cause.

A much broader reform of tax is required from the context of both simplification and investment options stacking up in investment merit, not tax.

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.

They delivered a surplus in 2012/13 too according to their own propaganda.

I wouldn't be counting on it.

sydboy007 · 12 February 2013

drsmith said:
A much broader reform of tax is required from the context of both simplification and investment options stacking up in investment merit, not tax.

They delivered a surplus in 2012/13 too according to their own propaganda.

Quite true. I don't see it happening till we're faced with another banana republic crisis

As for a budget surplus, the LNP have their own propaganda of a budget surplus all the way through a GFC. Neither side is particularly honest these days. Time for a third wave party to come through and give the bastards a good shake up.

FlyingFox · 12 February 2013

Vixs said:
On the investment side, it's a crap investment option.

It's a small part of portfolio allocations used to smooth out the rougher and more volatile returns on equities - it dulls the good years and pretties up the bad ones. It is where you keep your money when you don't know where to keep your money, or when you'll need it in the next 5 or so years.

You don't get wealthy by putting cash in the bank, you just get more cash in the bank.

Not always but point taken. You would have done very nicely by putting money away at 18% in the early 90's.

Vixs said:
The government needs people to achieve capital growth in their super to allow a self-funded retirement that is not dependent on the pension.

They want and need us invested in global and domestic equities, corporate bonds, government bonds, infrastructure, residential direct property, commercial indirect property - while the more defensive options don't have an element of capital growth, a portfolio incorporating the above does, and should have smoother returns year after year. Specialisation or focus might bring higher returns but it will also risk bigger losses.

The government needs people to achieve capital growth to show that the economy is growing more than anything else. The super part (and investment part) is good unless you happen to retire during a GFC type event or got in and out at the wrong time.

Vixs said:
On an economic level, they want us to spend and spend and borrow and borrow. On a future investment level, they don't want to see a dollar more in cash than the banks need to provide liquidity. On a policy level, they don't want us getting a reduction in taxes, it hits the hip pocket when it's already hurting.

+1. Ofcourse all this shows up in growth figures.

Vixs said:
I don't really understand the logic - cash is an unattractive investment asset class and always will be over the long term, as it produces nothing but more cash on the banks balance sheet to allow more lending.

Fractional lending aside, where do you think the loans come from? Risk averse investors want a stable, risk free return. You're welcome to borrow it to get a better return if you wish. Ideally there should be a balance between the two.

doctorj said:
I don't understand the desire to make government insured risk free bank accounts earn an even higher rate of interest. Aussie interest rates are already so much higher than the rest of the developed world.

Ideally the accounts were not and should not be guaranteed but yeah. The reverse argument is interest rates are too low elsewhere which leads to....

doctorj said:
Arguments about taking a balanced approach to risk aside, it's healthy for a country to have a capital base that is willing to take risk. We already have so much of our capital base tied up in unproductive property, why promote any more of it than necessary going to banks?!

Agreed to an extent. The problem is getting the balance right. You don't want misallocation of capital and growth for the sake of growth and bubbles (e.g your comment about unproductive property).

The counter argument is one of survival of the fittest type scenario. Again fractional lending aside, if the price of money was higher, you may not get as much speculation as you might with low interest rates. It's also arguable that you may not get as much capital hoarding as you might (e.g some large US corporations raised many billions with corporate bonds at 1-2%)

The really good ideas and business and investments would still flourish and I would argue that you would have a smoother economy. However the growth figures etc will not be so nice but why does the economy have to grow at 2-3% why can't we be happy with growth of 0.5%?

drsmith said:
That to me would only make the tax system even more complex than it all ready is as it is only treating the symptoms and not the cause.

A much broader reform of tax is required from the context of both simplification and investment options stacking up in investment merit, not tax.

+1.

drsmith · 12 February 2013

sydboy007 said:
Time for a third wave party to come through and give the bastards a good shake up.

We won't get that, unless you wish to count the Greens.

How to make earning interest a better option

sydboy007

medicowallet

craft

McLovin

tech/a

No Ordinary Duck

white_goodman

BOC

white_goodman

BOC

sydboy007

medicowallet

FlyingFox

FlyingFox

McLovin

Macquack

Vixs

doctorj

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drsmith

sydboy007

FlyingFox

drsmith

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