There is a problem with how interest is taxed. The problem is that the tax system does not take inflation into account. When you earn interest on your deposit, all of it is taxable, not just the part in excess of inflation. Conversely, if you borrowed money against an income producing asset, all the interest is tax-deductible.
Therefore we have a distortion that penalises people who put money in the bank. This distortion also favours heavily geared investments over investments that use a lot of equity. And the distortion favours the people with the clever accountants over the rest of us.
I believe that only the non-inflation component of interest should be taxable or tax-deductible. That would be a fairer system.
Such a system would not be hard to implement. It could be implemented as some sort of electronic currency which I am going to call "indexed dollar". The value of the indexed dollar would be defined in terms of the regular Australian dollar by the Australian Bureau of Statistics based on inflation estimates and adjusted at least daily. Banks and various other financial institutions would be required to produce account statements with an extra set of columns showing indexed dollars. In the first few years it might be sufficient to make this mandatory only for electronic account statements. At the end of each financial year, financial institutions would be required to tell their customers how much interest they earned or paid on their deposits and loans in both regular and indexed dollars.
Indexing could be introduced gradually, by half a percent per year each year.
For capital gains tax, the same problem applies. The difference is that only half of all capital gains are taxable. I propose that, as with interest, only the capital gains in excess of inflation should be taxable but otherwise fully. This would apply only for new investments.