The abandoned tax, which was proposed by the former Labor government, was designed to protect depositors in the event that an Australian bank collapsed.
Prime Minister Tony Abbott said yesterday afternoon that "Labor's bank deposit tax is dead".
"The last way to make our banks strong, the last way to protect depositors, is to hit banks with more taxes. That's the Labor way. It's not the Coalition's way," Mr Abbott said.
Treasurer Joe Hockey said the banks have recognised that they must increase their capital, therefore going through with the levy would only harm depositors.
"Now is exactly the wrong time to apply such a tax to bank accounts, when people are receiving lower returns than they may have expected in the past," Mr Hockey said.
The tax would have applied a 0.05 per cent tax on all bank accounts with deposits of up to $250,000 from the start of next year.
The Customer Owned Banking Association (COBA) has come out in support of the government's decision to abandon the tax.
COBA chief executive Mark Degotardi said: "The government's decision is pro-consumer and pro-competition."
"The decision supports the more competitive and resilient financial system recommended by the independent Financial System Inquiry.
"[Yesterday's] announcement is significant for savers and the customer-owned banking sector. It shows the government is committed to good policy and a competitive and resilient financial system," he said.
The Centre for International Finance and Regulation (CIFR) previously criticised the tax, arguing that it would be ineffective.
Andy Schmulow, CIFR researcher, said: “If Australian depositors are protected as preferential creditors by law (which they are), and if, at current capital adequacy levels, no Australian bank would be unable to refund domestic depositors, then the obvious question is why do we need this levy?”
Dr Schmulow pointed out that the Banking Act 1959 protects Australian depositors by stating that in the event of a collapse, the bank is required to reimburse Australian depositors before settling claims by international creditors or offshore depositors.
CIFR also voiced concerns that the funds raised and subsequently held in a Financial Stability Fund (FSF) would take years to mature and be able to be used as a bailout fund.
