Household savings are a vital component of our economy. They enable individuals to achieve the consumption they desire, including through retirement, while insuring against adverse life events or periods of low income. The intergenerational transfer of savings is a means for families to assist their children. Household savings also contribute to the pool of capital that finances business investment and infrastructure, supporting national productivity and living standards.

Taxes influence how much people save and the types of assets in which they choose to invest. In Australia, there is no consistency between the taxation of different forms of savings, with some savings vehicles, like the family home or superannuation taxed lightly or subsidised, while others, like bank deposits, taxed heavily.

The goal of this report is to provide a framework for improving the taxation of savings in Australia over the medium to long term and to demonstrate a consistent approach for evaluating policy proposals to change existing savings taxes. It does so by tackling three questions:

1. What is the ideal arrangement for taxing savings (chapter 2)? The paper outlines the findings of the optimal tax literature and the major government tax reviews in Australia and abroad (e.g., Henry Tax Review (Commonwealth of Australia 2010), the 2015 Tax White Paper (Commonwealth of Australia 2015) and the Mirrlees Tax Review in the UK (Mirrlees et al. 2011)) and develops a set of four ‘policy rules’ that can be used to evaluate savings tax design and policies.
2. How does the current system of taxing savings measure up against that ideal (chapter 3)? The existing system is assessed against those principles, with the Marginal Effective Tax Rates (METRs) calculated for the major types of savings held by Australians. METRs quantify the extent to which distinct forms of savings are taxed differently.
3. How should the current system be reformed (chapter 4)? This report argues the best approach to taxing savings is a dual income tax system, where the income from most forms of savings is taxed at a low, flat rate, separate to taxes on labour income (which is taxed through the personal tax system). While that should be the long-term goal, the report identifies reforms that can be implemented in the short-term, that improve the existing system and would form intermediate steps towards a dual system of income taxation. Further investigation of these reforms should be a priority for both federal and state governments.