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ANZ today welcomed the decision of the South Australian Government it would not be proceeding with its planned bank tax.
ANZ Chief Executive Shayne Elliott said: “This is positive decision for all South Australians and a clear sign the State is once again open for business and investment.”
“We look forward to continuing to invest in our South Australian business with renewed certainty, which remains an important part of our business here in Australia,” Mr Elliott said.
South Australia’s new bank levy, projected to earn A$370 million over four years, seems to be constitutionally valid but it remains hostage to political machinations.
While precise details are sparse, the Major Banks Levy will target those institutions liable for the Commonwealth bank levy (Commonwealth Bank, ANZ Bank, Westpac, National Australia Bank and Macquarie Bank). It will impose a state levy of 0.015% per quarter of South Australia’s share (about 6%) of the total value of bank liabilities subject to the federal government levy.
By making Commonwealth grant payments conditional on the removal of a levy, the federal government could force South Australia to abandon its bank levy.
It’s here that South Australia can benefit from the cover provided by the federal government’s bank levy. The federal government would be forced to tread a very tight line if they try to argue that it is fine for them to tap the banks’ honeypot but not for the states to do it too.
With new sources of state funding rare, South Australian treasurer Tom Koutsantonis has exploited this political opportunity, potentially signalling a shift of power back to the states. Unsurprisingly, the banks have reacted with fury, mounting their own attack campaign and threatening reprisals.
The constitutional validity of South Australia’s bank levy rests on the distribution of taxation powers in the Australian federation. The power of the states has been eroded over time as the Commonwealth gradually came to dominate the federation.
The Constitution assigns almost equal power over taxation to the states and the federal government. Under Section 51(ii) the federal government is granted a power to enact laws with respect to taxation, but “not so as to discriminate between states or parts of states”.
However, Section 90 grants the federal government the exclusive power to impose “duties of customs and of excise”. So a state tax will generally only be constitutionally invalid if it’s characterised as a duty of custom or excise, or if it is incompatible with a Commonwealth Act.
Back in 1942, the federal government used its power under Section 96 to gain an effective monopoly on income tax. Under the scheme, the federal government levied a uniform tax on income, then gave a grant to the states equal to the income tax they had collected on the condition they cease collecting income tax.
In South Australia v Commonwealth (1942), the High Court upheld this effective takeover of income tax. While states retain the right to levy income tax, the risk of losing Commonwealth grants (together with administrative cost and competitive pressures) has made the proposition unattractive.
The federal government has consolidated more power through the expansive definition given by the High Court to the meaning of “duties of excise” in Section 90. For example, in the court case Ha v New South Wales (1997) a majority of the court held that duties of excise are taxes on the production, manufacture, sale or distribution of goods. As this is an exclusive federal government power, the states are effectively prohibited from taxing goods – such as sales tax.
The states have instead been forced to rely on a range of relatively inefficient transaction taxes (that is, stamp duties on certain written documents), on land taxes, and on payroll tax (levied on the wages paid by employers). The narrow base of these taxes has seen the federal government come to dominate taxation revenue – collecting more than 80% of tax revenue in 2015-16.
This “vertical fiscal imbalance” leaves the states dependent on federal government grants, together with any conditions attached to such grants. As Professor Alan Fenna has observed, the states are left:
…scrounging for revenue in economically inefficient or socially undesirable ways and going cap in hand to the Commonwealth.
With opportunities for the states to introduce new forms of taxation being so limited, the proposed South Australian bank levy is something of a game-changer.
The levy’s structure doesn’t appear to involve the taxation of goods in a way that would go against Section 90 of the Constitution. The banks are being taxed on the basis of the value of an asset class they hold – in a way that is comparable to land tax.
Given the small percentages involved, this levy does not seem to interfere with the federal government’s levy, and would arguably not be incompatible with it. While relatively novel, the tax appears on its face to be constitutionally valid.
However, the politics of the issue is far more vexed, as the dark shadows of the federal government tied-grants scheme loom over all matters involving state tax. As Western Australia has learned, raising state taxes can have catastrophic unintended consequences. After that State raised mining royalties during the mining boom, the Commonwealth Grants Commission drastically reduced its share of GST payments – down to 34 cents in the dollar.
The fate of the state levy remains uncertain, with the politics very much in flux. What is clear is that the other states are taking notice.
With growing frustration over fiscal dependence on the federal government, it seems we may be entering a new phase of innovation in state taxation. Perhaps the federation is not yet dead.
Author: Joe McIntyre, Senior Lecturer in Law, University of South Australia
The Australian Bankers’ Association has today released a new report showing the banks targeted for a new tax in South Australia are actually among the highest corporate taxpayers in the country.
“South Australian Treasurer Tom Koutsantonis claims that a new tax will ensure ‘the sector contributes its fair share’, despite the fact that the industry paid over $14 billion in tax last year alone,” ABA Executive Director – Industry Policy Tony Pearson said.
“In terms of tax paid, it is banks first, daylight second. Banks make the highest contribution by far to help governments at all levels fund essential public services such as hospitals, schools and roads, and income support for those in need.”
The report, Taxes and other levies paid to governments in Australia by the banking industry, shows that in 2016 banks contributed over half of all income tax paid by the top 200 ASX companies.
“The Weatherill Government simply doesn’t get it,” Mr Pearson said.
“The banking industry makes a vital contribution to the community. Banks employ 140,000 people around the country – around 8,000 of those in South Australia.
“In 2016, banks paid $25 billion in wages and salaries to staff, $26 billion in dividends to shareholders – many of whom are mums and dads – and $66 billion in interest on bank deposits and bonds,” he said.
A copy of the report is available here.
South Australia’s state-based version of the federal bank levy is unlikely to be the last tax increase for Australia’s major banks, says UBS.
South Australian Treasurer Tom Koutsantonis announced his own version of the federal bank levy in Thursday’s budget, which is expected to raise $97 million in 2017-18.
The SA bank levy will have a similar model the federal levy, taxing 6 per cent of applicable bank liabilities.
The Australian Bankers’ Association (ABA) was quick to denouce the SA bank levy as an “outrageous tax grab”, labelling it as an example of “triple dipping” by the state government.
ABA chief executive Anna Bligh called on the other state premiers and first ministers to “rule out a similar tax”.
But UBS bank analyst Jonathan Mott said “Pandora’s Box is officially open”, and it is possible other states will follow SA’s lead and introduce further levies on the banks.
“Additionally, with the federal election 12-18 months away further increases in the federal bank levy cannot be ruled out, especially if the Australian budget remains under pressure,” Mr Mott said.
He pointed out that a similar bank levy introduced in the UK was subsequently raised nine times.
The banks are likely to “push back hard” against the SA levy on a number of fronts, Mr Mott said.
Potential response could include a legal challenge, increases in mortgage rates and a threatened move overseas, he said.
“Although South Australia’s levy of $97 million across the majors and Macquarie is insignificant (at around 20bps of pre-tax profit) it is an outcome many investors had feared,” he said.
“We remain cautious on the outlook for the banks given the myriad of headwinds. We struggle to see what will drive bank share prices sustainably higher.”
The SA budget today contained a surprise. They plan to charge a 0.015 per cent levy on the major banks bank bonds and deposits over $250,000 but will exclude mortgages and ordinary household deposits.
The tax to be introduced 1 July is expected to raise $370 million over four years.
At it represents SA’s estimated share of bank liabilities subject to the Commonwealth’s quarterly levy, and the state treasurer cited the profitability of the banking sector and suggested that they have not been doing right by their customers.
So now the risk will be other states following suite. The banks are an easy target, profitable and unpopular; but we need to be aware of the unintended consequences of this move. Once again it is likely the costs will be passed on the bank customers, as the tax will lift the banks treasury costs, so this becomes an further indirect tax on consumers, just rather well hidden. And “convenient”.
The ABA responded:
Sydney, 22 June 2017: A new proposed tax on five Australian banks by the South Australian Government is an outrageous cash grab without policy substance, the Australian Bankers’ Association Chief Executive Anna Bligh said today.
“States are not responsible for banking policy. There is absolutely no policy reason for this announcement, other than a need for the South Australian Government to raise revenue in a desperate political move,” Ms Bligh said.
“Let me be clear – it is not the job of banks to prop up government budget shortfalls.
“South Australia is a state that needs economic confidence – at 6.9 per cent it has the highest unemployment rate nationally. Today’s announcement is the worst possible signal to the business community in South Australia and will make South Australia less competitive, potentially driving jobs to other states,” she said.
“This announcement is staggering for a group of Australian banks that are already among the highest corporate tax payers.
“These are banks that provide jobs for South Australians, lend to South Australian businesses and help South Australians into their homes.
“Tax policy in Australia is now becoming a joke at the whim of political opportunism and South Australia is trying to impose triple dipping for bank taxation,” Ms Bligh said.
“The banks impacted by this proposal pay full corporate tax, the Federal Government has just passed a new bank tax and now the South Australian Government is trying to impose a third state tax.
“The impacted banks call on every Australian Premier and First Minister to rule out a similar tax.
“Furthermore, when the GST was introduced, a range of state taxes were eliminated, including some state taxes relating to financial institutions. Today’s announcement is a step back in time.”
ANZ Chief Executive Officer Shayne Elliott today responded to the South Australian Government’s announcement of a new state-based bank tax.
Mr Elliott said: “This deeply concerning tax will likely impact business investment in South Australia at a time when its economy is struggling with low growth, low business confidence and high unemployment.
“All businesses will rightly question the political risk associated with investing in a State with a Government prepared to unfairly target an industry that has played a significant role in supporting its lagging economy.
“South Australia does not need another drag on its economy after the repeated power failures over the last few years. Given its issues they would be wise to be more welcoming of both investment and capital,” Mr Elliott said.
“The comments attributed to the State Treasurer show a clear lack of understanding of the role banking plays in supporting the South Australian economy and the damage that opportunistic and ill-considered cash grabs will have on the long term economic prospects of the State,” Mr Elliott concluded.
Today’s announcement by the SA Government is poor policy without logic.
The role of the Australian banks is to support customers and communities and drive economic growth and activity. It is not to be a blank cheque so governments can cover their own budget shortfalls.
South Australians want their state to be more attractive to investment that will enable it to transition its economy and create new opportunities and jobs – this tax will do the opposite.
Interesting report from The Centre for Independent Studies – “The Major Bank Levy: We’re all going to be hit“.
The major bank levy was proposed in the 2017–18 Budget. The levy has numerous flaws including:
- The costs of the levy will likely be passed on as higher interest rates for mortgages and business loans, harming households and business investment which is very weak.
- The levy won’t materially change the expected surplus, based on current forecasts and therefore will minimally impact Australia’s AAA credit rating.
- If the big banks have ‘unfair’ advantages, it is far better to remove those advantages than impose a levy.
- If the levy is supposedly pro-competitive, this prejudges and devalues a separate Productivity Commission (PC) inquiry into this issue, which has been compromised before it even starts.
- The development of the levy breaches numerous requirements for best practice regulation and increases sovereign or regulatory risk.
- The levy cannot be ignored as being small relative to the economy. A bad policy is bad no matter what its size, and the levy is likely to be increased to a more harmful level.
- Banks will be encouraged by the levy to use funding that is more risky for the financial system or taxpayers.
- If the levy confirms large banks are Too Big To Fail, this contradicts official work to ensure this does not occur, and will increase financial market risk.
The Senate Inquiry on the Bank Tax reported yesterday. Subject to consideration of the other recommendations, the committee
recommends that the bills be passed. It was, last night.
Recommendation 1 – The committee recommends a review be conducted by the Senate Economics Legislation Committee in a minimum of two years to examine:
- the efficacy of the policy in fulfilling its stated objectives;
- the effect on competition in the Australian banking market; and
- whether the levy is required in perpetuity, including the need for a further review at the time the stated objective of the levy is achieved; that is when the budget has been ‘repaired’.
Recommendation 2 – The committee recommends that Treasury closely examine issues relating to the technical aspects of the bills to determine if changes are required to avoid double taxation and/or to narrow the liability base.
Recommendation 3 – The committee recommends that Treasury provide greater explanation as to the rationale for the method of liability calculation which presently excludes foreign banks, and specifically provide an explanation as to why Macquarie Bank is subject to the levy while foreign based competitors are not.
Recommendation 4 – The committee recommends that the legislation be amended so that the Treasurer may, on the advice of APRA, suspend the application of the levy to any or all Authorised Deposit-taking Institutions in extreme financial or economic circumstances.
Recommendation 5 – Subject to consideration of the other recommendations, the committee recommends that the bills be passed.
Within the 30 page report, we found the comparative table on bank levys most interesting.
From Mortgage Professional Australia.
As Australia’s government indulges in another round of bank bashing, brokers could get caught in the crossfire, writes MPA editor Sam Richardson
At 10AM the ASX opened and the bank stocks began to plummet. ANZ, CBA, NAB and Westpac were hit, as well as Macquarie: nearly $14bn was wiped from their share prices in total. This would all have made sense on 10 May, the day after the government unveiled a new 6 basis point bank levy, but the price collapse occurred on 9 May, nine and a half hours before the budget was unveiled.
Evidently someone knew the bank levy was coming, if not the banks themselves.
“This new tax is not a well-thought-out policy response to a public interest issue,” commented Australian = Bankers’ Association CEO Anna Bligh. “It is a political tax grab to cover a budget black hole.”
Although it is equivalent to just 0.06% of a bank’s liabilities, and affects only the big banks and Macquarie, the levy is expected to bring in $6.2bn over four years. The government says the levy will apply from 1 July, although it is less clear when it will end, or how the banks will pay for it.
Raising rates isn’t an option, according to Treasurer Scott Morrison. “Don’t do it,” he told banks the day after the budget. “Don’t confirm their worst impressions. Tell them another story. Tell them you will pony up and help fix the budget.”
Rate rises and competition
Australia’s banks don’t appear to agree. Commonwealth Bank CEO Ian Narev has already warned that “higher costs are either passed on to customers through reduced service levels or higher pricing, or to shareholders through lower returns. There is no middle option to absorb costs.” While not explicitly stating they’ll raise rates, the other banks have made similar points to Narev’s.
Major bank borrowers’ interest rates could rise by 20 basis points, analysts from investment bank Morgan Stanley have predicted.
Martin North, principal of research firm Digital Finance Analytics, made a similar claim when speaking to MPA. “Because the mortgage book is half of the total book you assume there would be a 15–20 basis points hike in mortgage rates, if they put it all through.”
Although the levy will only affect the big five, refinancing your customers with the nonmajors may not be the best option, North warns. “If the big four reprice their mortgages I’m pretty sure the regionals will follow anyway, because they need to do margin repair on their books.”
Adelaide and Bendigo Bank CEO Mike Hurst and others in the non-major sector have welcomed the levy as a way to even the competitive playing field. Deloitte told MPA that concerns about competitors could dissuade the banks from making aggressive rate hikes. However, North says the non-majors still face a “significant competitive disadvantage” because of higher capital requirements.
Foreign-owned banks could be the main beneficiaries of the budget, according to the major banks. ING DIRECT and HSBC have the ability to raise funds from overseas while being exempt from the levy due to their small presence in Australia. Foreign-owned banks start from a low base, however: ING’s share of AFG’s lending was just 3.51% in February, while HSBC only resumed dealing with brokers in June.
Unscrambling the egg
Standing between major bank borrowers and higher rates is the ACCC. Morrison has tasked the ACCC with forcing the banks to explain future rate changes and ensure they don’t use rate hikes to pass on the levy.
Unfortunately for the Treasurer, explaining rate hikes is “like trying to unscramble an egg”, says DFA boss North. “I think it would be impossible to identify which elements of funding, or the levy, would be responsible for moving prices up or down. There’s a whole host of reasons why, outside the levy, prices will continue to rise,” he explains. International funding is still expensive; the banks are still hindered by overly cheap loans from last year; APRA is forcing them to reduce interest-only lending, and, finally, capital requirements continue to increase. At the end of the year APRA will publish a paper which North expects to recommend raising rates and consequently rates on mortgages.
Therefore, says North, “we have not seen the end of the mortgage rate hikes”.
“There is no middle option to absorb costs” Ian Narev, Commonwealth Bank
Impact on brokers
The government’s bank bashing could end up hitting brokers.
“This levy comes at a time when bank earnings and profitability are already facing multiple headwinds,” warned credit ratings agency Moody’s, pointing to moderate credit growth, low interest rates and rising capital requirements. Coupled with further scrutiny of vertical integration by the Productivity Commission later this year, the banks have the incentive to take radical action.
Banks could save billions of dollars by cutting broker commissions, according to UBS. The investment bank claims that the cost of brokers is rising and accounted for 23% of the cost base of the major banks’ personal/consumer divisions in 2015.
Analysts Jonathan Mott and Rachel Bentvelzen wrote: “We estimate mortgage broker commissions add 16bp per annum to the cost of every mortgage in Australia, irrespective of whether the mortgage was broker or proprietary originated.”
Following the ASIC and Sedgwick reviews the banks will start to lower commission rates over the next few months, the analysts have predicted. “While mortgage brokers are unlikely to be happy with this outcome, we believe there is little they can do,” they said. Competition between banks would keep interest rates low, however, and “offset the additional repricing expected by the banks as they adopt the new Bank Levy”.
Sedgwick’s review gave the banks until 2020 to enact its recommendations, without explicitly recommending cuts to commissions. The consultation period for responses to ASIC’s review closed in June, making it unclear how banks would radically change commissions in time for the implementation of the levy on 1 July.
Whatever the outcome, the budget has created a $6.2bn reason for Australia’s banks to start making changes.
COBA’s opening statement focussed on the impact of the implicit guarantee which the large banks enjoy, which they says is distorting the banking market by providing the biggest players with an unfair funding cost advantage. They welcome the major bank levy as a modest step towards reducing this funding cost advantage.
COBA is the industry association for Australia’s customer owned banking institutions – mutual banks, credit unions and building societies.
We have 4 million customers, around 80 institutions across Australia, $106 billion in assets and roughly 10 per cent of the household deposits market.
This Bill is primarily about Budget repair but it is of course intended to contribute to a more level playing field in the banking market.
It comes as no surprise we strongly support measures to promote competition in banking because they are very clearly needed.
There is a big problem with competition in banking in this country.
In his second reading speech, the Treasurer noted that:
- the banking sector is an oligopoly and that the largest banks have significant pricing power which they have used to the detriment of everyday Australians
- the banking system is highly concentrated
- major banks benefit from a regulatory system, including mortgage risk weight settings, that has helped embed their dominant position.
From our perspective, the most important component of the Bill is that it is intended to complement prudential reforms being implemented by the Government and APRA to improve financial system resilience and competition.
We support measures to reduce unfair competitive advantages enjoyed by the major banks.
One of these is the unfair funding cost advantage enjoyed by these banks as a result of the implicit guarantee provided by taxpayers due to the perception that the major banks are ‘too big to fail’.
COBA welcomes the major bank levy as a modest step towards reducing this funding cost advantage.
In relation to the broader prudential reforms being implemented by APRA and the Government, we note that the ‘too big to fail’ problem is the target of Recommendation 3 of the 2014 Financial System Inquiry report.
That recommendation calls for implementation of a framework in line with emerging international practice, to facilitate the orderly resolution of Australian ADIs and minimise taxpayer support.
The Government’s 2015 response has no specific implementation date, but says steps should be taken to reduce any implicit government guarantee and the perception that some banks are too big to fail.
The Government has endorsed APRA as Australia’s prudential regulator to implement this recommendation in line with that international practice.
We acknowledge that the ‘too big to fail’ problem is a very complex problem to solve but we would encourage the Government and APRA to continue to give this issue the highest possible priority.
This is because the ‘too big to fail’ problem tends to get worse over time. The unfair funding cost advantage creates incentives for major banks to become even bigger and more complex.
The 2014 Financial System Inquiry report said perceptions of implicit guarantees have costs, creating distortions in the market.
The report said credit rating agencies explicitly factor in ratings upgrades for banks they perceive to benefit from Government support, directly benefiting those banks. As has been said by previous witnesses, this was worth a two-notch upgrade for the major banks in 2014.
As of last month, at least in relation to one of the rating agencies, Standard & Poor’s, that two-notch upgrade is now three notches.
The implicit guarantee is distorting the banking market by providing the biggest players with an unfair funding cost advantage.
The regulatory framework helps the major banks in other ways.
Compared to major banks, customer owned banks and regional banks have to hold much more regulatory capital against mortgages. This gives the major banks another significant funding cost advantage.
APRA has formally designated the major banks as ‘systemically important’ and applied a capital surcharge on them of 1 per cent.
But this surcharge is right at the bottom end of the international spectrum of such capital surcharges, which range up to 6 per cent in some cases.
We have a banking market where major banks benefit from unfair regulatory capital settings and a subsidy from taxpayers.
The major bank levy is a modest but welcome step toward a more level playing field in banking.
So from our point of view, we look forward to APRA and the Government working on the broader prudential reform agenda to promote competition and resilience in the banking market.
Consumers stand to gain from a more competitive banking market where all competitors have a fair go.
NAB’s address mirrored the ANZ approach. Whilst accepting the tax will be implemented, they call for a sunset clause, extension to foreign banks operating in Australia; and a review of implementation after 18 months. They also make the point the tax cannot be absorbed.
We are pleased to appear before you to discuss the major bank tax.
While limited, this Senate Inquiry is an important process and one that NAB and our Chairman Ken Henry has advocated for – to ensure transparency and a greater understanding of the consequences of this tax.
With me is our Treasurer Shaun Dooley. I will make a short statement and then we are both happy to take your questions.
Banking plays a vital role in the strength and stability of the Australian economy.
This has been well understood by governments in the past.
Historically, we’ve had constructive engagement on significant policy reform which has allowed everybody to fully understand the impact on bank customers, our business and the economy.
As Treasury Secretary John Fraser told this Committee just last month: “any rapid policy change or uncertainty can affect the confidence of businesses and consumers and this in turn can undermine growth”.
The major bank tax is rapid policy change and has created real uncertainty.
There are four key points that are central to our concerns:
Firstly, the lack of consultation and rushed process has contributed to the development of poor tax policy that will affect every Australian.
While the UK bank tax was introduced under vastly different circumstances, consultation with the industry there extended for three months.
In contrast, the major Australian banks had about 40 hours to provide submissions based on the draft legislation.
As a result, many questions remain. The impact on the economy is still not fully known and there will be unintended consequences that will need to be addressed.
Secondly, it has repeatedly been stated that the tax can be simply “absorbed” by the banks. No cost, such as a tax, can be absorbed by any business – it must be passed on somewhere.
Based on what we know to date and applied to NAB’s business as it stands, we estimate the cost of the bank tax on NAB would be around $350 million annually pre tax, or $245 million post tax.
No decisions have been made on how NAB will manage this additional cost. But the cost will be borne by one or a combination of these groups: our customers – borrowers and savers – our shareholders, our suppliers or our employees.
Thirdly, the inefficient design of this tax places the impacted major Australian banks at a competitive disadvantage in wholesale markets that are critical to a well-functioning economy.
In these markets the Australian banks compete against large and profitable global institutions that are not impacted by the tax – because their domestic liabilities do not exceed the tax’s $100 billion threshold.
And lastly, we need to be clear about the purpose and impact of the tax to ensure confidence in the Australian banking sector.
Offshore investors have voiced their concerns about the tax and what it says about relations between the Australian banks and the Government.
This is due to the surprise nature of the intervention and the “shock” it created – coupled with the lack of a clear explanation and apparent conflict with previous regulatory guidance.
Confidence in the Australian banking sector is vital to ensure Australia has access to off-shore funding and capital.
These global investors have choice as to where to invest their money and the lack of clear policy rationale has been of concern, and goes directly to confidence in our market.
Senators, we accept that this tax will be implemented. However we strongly urge you to consider the following three points:
A sunset clause so that when the Budget returns to surplus the tax is removed;
To widen the tax to include international banks operating in Australia; and
Commit to a review of the tax within 18 months of implementation to fully assess its impact and any potential unintended consequences.