FEDERAL BUDGET 2010: Tax break for savings underlines push to build financial services hub

Taxpayers will receive a 50% tax break on the first $1,000 interest they earn on banks deposits, bonds and annuities under new rules to come into force from July 1, 2011.

While the Government is selling the tax break as a way to boost the nation’s savings as the population ages, the deduction will also help Australia’s financial services sectors as more taxpayers pile into savings products.

The tax break is just one of a suite of measures that the Government hopes will turn Australia into a financial services hub, including a phasing down of the interest withholding tax paid by financial institutions on foreign borrowings and the creation of a new Centre for International Finance and Regulation.

These initiatives are part of the Government’s response to a recent review undertaken by Mark Johnson, which recommended earlier this year that the Government should introduce a series of measures to make Australia into a regional financial services hub.

The key measure in achieving this goal is the phasing down of the interest withholding tax, which is paid by financial institutions on the interest they earn from foreign borrowings.

By cutting the tax from 10% to 5% and promising to cut it to zero when it is “fiscally possible” the Government hopes to make Australia more attractive to foreign banks and institutions.

This should eventually have a spill-over benefit for small business – more banks entering the market should mean more competition, which should eventually help to ease the squeeze on bank finance for business.

The Government will also spend up to $25 million over the next four years to create a Centre for International Finance and Regulation, with a consortium of universities to be appointed to host the centre, probably next year.

The Centre will provide training and education for financial regulators around Australia and the Asia Pacific, conduct research into the financial services sector and build links with regional regulators.

On top of the previously announced increase in the Superannnuation Guarantee from 9% to 12%, which will be phased in over the next 10 years, the focus on financial services in the Budget will ensure cash and expertise continue to pour into the sector in the medium-term.