The Australian Bankers' Association (ABA) denounced the Federal Coalition's opposition to reducing the interest withholding tax, claiming it was short sighted.
ABA chief executive Steven Münchenberg said the changes would make Australia more attractive to offshore capital.
The measure was announced as part of the Budget and included a tax break on deposits.
Münchenberg said reducing interest withholding tax could enable banks in Australia to raise more deposits overseas for lending within Australia. Overseas financial institutions with branches and subsidiaries in Australia would also be able to access funding offshore from parent companies.
He added that it made sense to make Australia more attractive to offshore capital as local banks could not source all of the funding required for domestic investment.
"This reduction in interest withholding tax will enable banks in Australia to compete more effectively in capital markets," Münchenberg said.