P&N Bank is pushing for legal changes to allow the distribution of millions of dollars in franking credits accumulated by customer-owned banks.
In a submission to the Federal Government's Financial System Inquiry, P&N Bank chief executive Andrew Hadley argues the current system penalises com- panies such as his because it does not distribute after-tax profits to shareholders.
The franking system allows organisations that have paid company tax on profits to provide shareholders with a tax credit that offsets the company tax paid.
"Customer-owned banks, unlike banks listed on the stock exchange, are at a disadvantage when it comes to the use of franking credits and our ability to pass the benefit to our members," Mr Hadley said.
"Currently, the franking credits system does not take account of companies that pay tax but then retain rather than distribute after-tax profits."
Mr Hadley said his submission was designed to encourage saving.
"Customer-owned banks should be given the ability to use their franking credits to offset the first $1000 of savings deposit interest earned by account holders each year," he said.
The measure could benefit hundreds of thousands of Australians, he claimed.
P&N Bank calculates that someone with $60,000 in a savings account earning 4 per cent interest would earn $2400 in interest a year but lose $1000 in tax, depending on their marginal tax rate.
The bank's plan would see that tax bill fall to $700.
"We are especially concerned to ensure that the inquiry takes into account the important role played by the customer-owned banking sector, especially as an alternative to the bigger commercial banks that dominate the marketplace," Mr Hadley said.
The Financial System Inquiry, which is being headed by David Murray, is the first major review of the country's financial sector since the 1990s. The inquiries before it, such as the Campbell Report in 1981 and the Wallis Report in 1997, sparked wide-ranging changes.
The Campbell Report saw the Australian dollar floated and the financial sector deregulated.
The Wallis Report triggered the creation of the Australian Prudential Regulation Authority and the contemporary form of the Australian Securities and Investments Commission.
The inquiry is due to report by November.