THE recent budget highlights the inability of the government to carry through on its decisions.
In the May 2010 budget they announced, with much fanfare, a 50% tax reduction on the first $1000 of interest earned. The reasoning was that growth assets such as property and shares receive unfair tax breaks, because the bulk of the profit from them came from capital gains which are taxed at half the rate of ordinary income.
The logic was faulty because it failed to take into account the risk free nature of term deposits as opposed to the risky nature of property and shares.
Obviously the architects of that concept had never heard of the risk/return trade-off.
At the time I wrote that it was a silly idea because it would take around $20,000 in savings to generate $1000 interest. Younger people with a mortgage would be far better off placing that money in an offset account, older workers would get a better tax break by contributing it to super and the retired would receive no benefit as most of them don't pay tax anyway.
Now, after two long years of deliberations, the scheme has been scrapped.
The Treasurer has made much of "levelling the playing field" by levying a special tax on deductible contributions made by high income earners. After all, why should a person on $300,000 a year get the same tax treatment as a person on $35,000 a year?
It's a consequence of the progressive tax system. If a country chooses to levy an increasingly higher rate of tax as income increases, a tax deduction will be worth more to a high income earner, simply because they're in a higher tax bracket.
It would be just as logical to levy a special tax on higher income earners with negatively geared properties because they receive a bigger tax refund from the government due to their higher taxable incomes. Maybe that will be in next year's budget.
Noel Whittaker is co-founder of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org