Close inspection: Banks say it's all in the detail.

Close inspection: Banks say it's all in the detail. Photo: James Davies

BANKS are complaining that a tax break for bank deposits is too complex and unlikely to trigger a meaningful change in saving habits.

In July, the government introduced a 50 per cent tax discount on interest earnings of up to $500, a measure it says will benefit up to 5.7 million Australians and support bank funding.

The policy goes part of the way to implementing the Henry review's call for a 40 per cent cut in taxes changed on interest - which is taxed at the top rate paid by a taxpayer.

While banks broadly support the plan, the industry has criticised Treasury's design for the scheme, saying it will require too much paperwork from households that only stand to make a small gain.

Lenders also say the $500 cap - which will rise to $1000 in 2012-13 - is too low to give people a strong incentive to put more of their savings into interest-bearing assets.

Under the scheme, Treasury has suggested the tax break would apply only to net interest income, after any costs from earning the interest have been subtracted.

The Australian Bankers' Association(ABA) said forcing households to calculate net interest income would present them with a ''compliance minefield''.

The majority of people would not incur significant expenses in earning interest, the association said, and forcing them to calculate net interest income ran the risk of causing the policy to fail.

As the discount was aimed squarely at consumers, the association said it would be far simpler to give the tax break to gross interest, rather than net interest.

''The ABA is concerned that the relatively low level of the proposed discount may not have a significant impact either in mitigating tax-induced distortions which affect the allocation of capital, or in increasing the level of national savings,'' it says in a submission to Treasury.

ING Direct also supported the move, but said the tax break would require too much work from households for a relatively small gain.

Someone earning $50,000 could save up to $88.75 on their 2011-12 tax bill under the scheme, ING said, rising to $177.50 in 2012-13.