Tag: The Budget

Bowen pledges to block ScoMo’s main housing measure

From The New Daily.

Shadow Treasurer Chris Bowen has slammed as “highly objectionable” the Turnbull government’s budget measure to allow young Australians to save for a deposit inside their super funds.

In his budget reply speech on Wednesday, Mr Bowen said most of the measures in the government’s “sham” affordability package were “ineffective”, but he took issue with what has been dubbed the ‘First Home Super Saver Scheme‘.

He confirmed Labor would vote against the “badly designed and ill thought out” proposal if and when it comes before Parliament.

Mr Bowen’s primary concern seemed to be that extra contributions from mortgage savers would be lumped together with compulsory contributions from employers.

“How voluntary contributions will be kept separate from compulsory contributions in the event of a downturn, where balances can contract, is beyond me. They can’t be.”

The budget papers say the scheme will allow first home buyers to salary sacrifice up to $15,000 a year, up to a maximum balance of $30,000, with a tax on contributions and earnings of only 15 per cent. When withdrawing the money to pay for a deposit, the lump sum will be counted as personal taxable income, but the tax rate on the money will be discounted by 30 percentage points.

The government has promised that whatever money a would-be home buyer salary sacrifices into super would be quarantined from losses. The Shadow Treasurer seemed to doubt this is even possible, let alone prudent.

Industry Super Australia has warned the scheme will hurt returns by requiring funds to “maintain more liquid asset allocations to deal with unpredictable withdrawals”. This means funds may have to invest more in cash and short-maturity securities, which carry lower returns.

Mr Bowen also said the scheme would breach the very same ‘sole purpose’ test the government is trying to legislate, which would clarify that super savings are intended to provide income in retirement to substitute or supplement the age pension.

“The whole idea of an objective is to have a benchmark against which changes to superannuation can be judged. Yet the government’s first proposed legislative change since announcing their preferred objective would undermine the goal of providing income in retirement.”

The Shadow Treasurer also disputed that super saver accounts would do anything to boost affordability.

“We know the government dabbled with all sorts of harebrained ideas to allow access to superannuation. The eventual model they settled on, allowing voluntary contributions to be withdrawn by first home buyers, will not make a difference for the vast majority of first home buyers,” he said.

“Without negative gearing and supply side reform, if it has any impact at all, it will simply drive up house prices. It is badly designed and ill thought out.”

Mr Bowen also ridiculed the government’s optimistic predictions for almost doubled wage growth by 2020-21, after the Australian Bureau of Statistics revealed that wages have continued to stagnate.

APRA’s non-bank oversight may curb mortgage risks

From Australian Broker.

Broader powers by the Australian Prudential Regulation Authority (APRA) to oversee the non-bank sector will have a positive effect on the residential mortgage market, said analysts from global ratings agency Moody’s.

The measures, announced in last week’s Federal Budget, could see APRA regulating lending by non-bank financial institutions.

This policy, if passed by the Australian government, would help curb riskier mortgage lending in the non-bank sector and thereby reduce any risks found in Australian residential mortgage back securities (RMBS).

“Non-bank lenders have significantly increased their origination of riskier housing investments and interest only mortgages over the past two years, a period over which APRA has introduced measures aimed at limiting growth of such loans by banks and other authorised deposit-taking institutions (ADIs),” analysts wrote in an article for Moody’s Credit Outlook.

“APRA currently regulates banks and other ADIs, but does not regulate lending by non-bank financial institutions. Instead, regulatory oversight of the non-bank sector is presently the responsibility of the Australian Securities and Investments Commission, which enforces responsible lending but does not have the power to implement macro-prudential policy measures.”

By extending APRA’s powers into the non-bank sector, the regulator would be able to set specific limits and ensure loan quality remains comparable to that of banks and other ADIs, Moody’s said. These broader powers would fall on top of the regulator’s March 2017 policy to monitor warehouse facilities that banks use to fund non-bank lenders.

In 2016, housing investment loans issued by non-bank lenders make up for 36% of all mortgages found in Australian RMBS, a large increase from the 16% found in 2015.

In a similar manner, interest-only loans accounted for 46% of all mortgages banking RMBS by the non-banks in 2016, compared to 21% in 2015.

Non-bank lenders write 6% of the total housing loans in Australia.

The bank levy’s critics are selling Australia short

From The New Daily.

The ‘bank levy’ that is causing such a political storm in Canberra may not be great policy in itself, but it will still be overwhelmingly good for Australia.

To understand why, it’s first necessary to ignore the silver-tongued protests of former Queensland premier Anna Bligh, now head of the Australian Bankers’ Association, and former Treasury secretary Ken Henry, now chairman of National Australia Bank.

They are using years of expertise developed on the public payroll to defend bank shareholders.

And don’t give much credence to CBA boss Ian Narev’s simplistic claim that “basically all Australians” are bank shareholders.

More than a fifth of the big four banks’ shareholders are foreign investors, and many middle- and lower-income Australians have superannuation holdings too puny to make them significant shareholders of anything.

A $100,000 super account, for instance, would likely have about $6000 in bank shares. The dividend earnings on those shares before tax would be about $300. And those earnings would, according to Treasury estimates, be reduced by 4 or 5 per cent – well under $20 a year.

Bloated banks

In Australia, banks have grown to a ridiculous size and make profits many times those of our biggest employers, Wesfarmers and Woolworths.

But it is not ‘market forces’ that have made them that way. They have grown much more than other sectors of the economy thanks to two levels of support from the federal government.

The first is the implicit guarantee provided by the government for the banks’ liabilities.

That guarantee swung into action during the GFC and became explicit, but it is always there – and the banks, and the institutions that lend to them, know it.

That means the big banks can borrow more cheaply. Even with the bank levy in place, they’ll still only be paying back a third of the benefit they receive from that guarantee.

Tax distortion

The second reason banks are so profitable is a simple matter of scale.

If property investors were not offered such generous tax concessions via negative gearing and the capital gains tax discount, they would not be able to borrow as much money to bid up property prices.

If they were unable to bid up prices, owner-occupiers would not have to borrow such large sums either – there would be fewer dollars chasing each available property.

And if those twin tax breaks were reduced, the banks’ mortgage books, and therefore profits, would be smaller.

Mr Henry himself argued to reform the housing tax breaks back in 2010 – but then he was employed by taxpayers, not a bank.

A political bind

The problem for Treasurer Scott Morrison is that the tax lurks that drive this bloated system disproportionately advantage voters in Liberal-held electorates, as a report released by the Australia Institute on Tuesday shows.

The think tank’s league table, showing the annual CGT refund averaged across all taxpayers in an electorate, is dominated by top Liberal seats.

Nationwide, the average claimed by taxpayers in Nationals seats is just $146, in Labor seats $297 and Liberal seats $672.

And therein lies the problem. The obvious and most effective way to reduce the credit bubble and bring banks back to the relative size and profitability seen in other developed countries is to reduce those concessions.

But as the Coalition can’t do that for political reasons, it is instead reclaiming some of the banks’ huge profits to shore up the federal budget.

It’s second-best policy, but it will at least help counteract the effect of not considering the first-best policy.

That said, the levy on the five biggest banks will collect $6.2 billion over four years – pretty small beer considering the government also plans to phase their corporate tax rate down from 30 per cent to 25 per cent over the next few years.

The question then will be whether people like Ms Bligh and Mr Henry complain with equal vehemence that banks again have it too easy.

Banks seek to delay levy implementation

From InvestorDaily.

The Australian Bankers’ Association (ABA) has called for the “usual consultation and policy processes” prior to the implementation of the bank levy contained in last Tuesday’s federal budget.

In a submission to Treasury on the major bank levy, the ABA said the budgetary measure is “rushed” and “not in keeping with the government’s own best practice guidelines”.

The levy would impose a tax of 6 basis points on the assessed liabilities of the ‘big four’ and Macquarie.

In its submission, the ABA called on Treasury to conduct a detailed regulatory impact status before the bank levy bill is introduced to Parliament.

In addition, the ABA repeated its calls for increased modelling on the economic and taxation impacts of the proposed levy.

The bank lobby group also pointed to the short consultation period on the draft legislation, which is set to be finalised before the bill is introduced to Parliament on 31 May 2017.

“The ABA are alarmed with the truncated time for consultation, as well as the fact there was no prior consultation, nor will exposure draft legislation be released for public comment,” said the submission.

“The ABA believes there is further opportunity for consultation as the tax will only be levied for the first time on 30 September 2017.”

The ABA also argued for a more “co-ordinated consultation” with all the affected regulators, including APRA, ASIC, the AOFM and the RBA.

“For example, the ABA believes it is crucial that Treasury and APRA be given adequate time to assess if the bank levy is consistent with developments in prudential regulation such as the unquestionably strong requirements and Total Loss Absorbing Capital (TLAC),” said the submission.

Treasury Receives Big Bank Feedback

NAB and ANZ have released their formal responses to Treasury relating to the liability tax.

NAB believes the levy is poor policy and, accordingly, does not support it. It says the levy is not just on banks, it is a tax on every Australian who benefits from, and is part of, the banking industry.  They then try to define the bounds and sensitivity of the calculation, with a view to reducing its impact.

NAB requests the production of a Regulatory Impact Statement (RIS) and a period of public consultation on the draft legislation. NAB recommends the levy be applied to the netted derivative balance sheet and collateral position. NAB recommends that the basis for the levy be adjusted for the impacts of the accounting gross ups which occur as a function of inter-company transactions. NAB recommends that the funding of high quality liquid assets be excluded from the levy calculation. NAB recommends that repurchase agreements be excluded from the calculation of the levy. NAB recommends the exclusion of non-funding liabilities, in particular, liabilities and provision for taxes and the levy. NAB recommends that, if included, only targeted anti-avoidance measures are contained in the
legislation. NAB also recommends that discretion be applied on any penalties for under payment.

It needs to be read in conjunction with their CEO’s earlier comments.

ANZ has more broadly tried to explain the potential impact of the tax on customers and shareholders. They also suggest a delay till September 2017 to allow sufficient time for design of the legislation and recommends the tax should be applied to the domestic liabilities of all banks operating in Australia with global liabilities above $100 billion. Finally, they argue the levy means it would be appropriate to re-think the need for any bank loss-absorption framework in Australia.

Westpac said last week:

“Westpac Group CEO, Brian Hartzer, said the new bank tax is a hit on the retirement savings of millions of Australians as well as all bank customers.

This levy is a stealth tax on their life savings, the shares in their superannuation accounts, and it will make Australia’s banks less competitive.

“Yesterday, $14 billion of value was wiped off Australian bank shares because of speculation around this new tax.

“There is no ‘magic pudding’. The cost of any new tax is ultimately borne by shareholders, borrowers, depositors, and employees.

“The Australian banks are already the largest taxpayers, with Westpac the country’s second largest taxpayer. Westpac already pays over 30% of its profits in tax and this will now increase even further,” Mr Hartzer said.

“While similar taxes operate in other international jurisdictions, they were introduced to recover the cost of Governments having to take over their banks. No taxpayer funds have been used to prop-up the Australian banks. In addition, international jurisdictions that apply measures such as this already have much lower corporate tax rates than Australia – for example, in the UK the corporate tax rate is 20%.

“It is disappointing that the Australian Government has implicitly favoured large foreign banks over Australian banks operating in their home market.

“In addition these reforms are directly counter to APRA’s objective of making the banks unquestionably strong, as higher taxes reduce the banks’ ability to generate capital that supports lending and stability in times of stress.”

Bank Tax Is Positive, Not Negative, For Big 5

Interesting take on the Bank Levy from Christopher Joye in the AFR.

For the first time big Aussie banks can point to the fact that they now pay a specific levy in lieu of their too-big-to-fail status, which should in theory further reduce their cost of debt and equity.

Previously this particular government guarantee was implicit: from July 1 it becomes explicit. This directly reduces the probability of default and loss on the banks’ deposits and bonds, which should shrink the interest they are required to pay. Equally the banks’ cost of equity should decline given they now have materially lower risks. The explicit too-big-to-fail government guarantee actually gives the banks grounds to go back to depositors and bondholders and demand that they pay less, not more, interest, precisely because their perpetual nature has now been written into law.

It is entirely possible that this reduction in the banks’ weighted-average cost of capital could completely offset the (modest) 0.06 per cent levy. Any residual cost can easily be shared with customers via slightly higher product costs. The banks are about to receive another excuse to jack-up loan rates when by “mid-year” the Australian Prudential Regulation Authority releases its new equity capital targets to ensure these too-big-to-fail-institutions remain “unquestionably strong”.

Since we are explicitly guaranteeing their longevity, setting unambiguously world-class, first-loss equity buffers has never been more important. And the policy solution we have arrived at, which involves taxing the subsidy while requiring banks to have bullet-proof balance-sheets, is superior to that originally proposed by the financial system inquiry, which left the subsidy in limbo. But I must admit surprise at the Australian Bankers Association’s rabid opposition to the levy given the vast bulk of its members (by number) enthusiastically support it, as the likes of Bank of Queensland and Bendigo & Adelaide Bank have made clear. Perhaps those deposit-takers sitting outside the oligopoly would be better served establishing their own independent organisation.

The final crucial point is that the tactical rationale for the government introducing this levy is to save Australia’s AAA rating, threatened by the $13 billion of zombie savings the Senate failed to pass. The loss of the AAA rating would likely have no direct effect on the government’s interest repayments. But it would lower the four major banks credit ratings from AA- to A+, which our research suggests would increase their borrowing costs by about 0.10 per cent annually (notably more than the levy). This point has been missed in the debate: much of the motive for balancing the budget and maintaining a credible 2020-21 surplus is keeping the rating agencies at bay on behalf of the banks, not the public sector. In this manner, Scott Morrison’s explanation that the levy will help with “deficit repair” is absolutely spot-on

First bank to move will have ‘hell to pay’

From The Advisor

The head of a major aggregator says the big banks have plenty of ways to absorb the government’s $6.2 billion levy other than hitting mortgage customers with a rate hike.

Yellow Brick Road general manager of lending Clive Kirkpatrick told The Adviser that the first bank to lift rates in response to the government’s actions will have “hell to pay”.

“The banks have more than one stakeholder involved. The only way they can absorb this tax is by sharing it with either the customer, shareholder or staff member,” Mr Kirkpatrick said.

“To say that the customer will need to bear the uplift is just not right. I heard the Treasurer say that surely out of $35 billion in profit they can absorb $6 billion,” he said. “There are many alternatives available to the banks. The first bank to pass on that tax to the customer will have hell to pay.”

The former head of St. George Bank’s third-party division wrote to Vow Financial brokers last week explaining the potential impact of some of the measures announced in the federal budget. He noted that the bank levy, which applies to Macquarie as well as the big four, could certainly drive up lending costs.

“Fortunately, we have multiple funding sources, so we can continue finding the best deals for our customers,” Mr Kirkpatrick said.

The ACCC has been tasked with holding the major banks to account over their home loan pricing decisions.

The commission’s new Financial Sector Competition Unit will be tasked with undertaking regular inquiries into specific competition issues across the financial sector, starting with a one-year price inquiry into residential mortgage products, which will run until 30 June 2018.

As part of this inquiry, the ACCC can compel the major banks to explain any changes or proposed changes to fees, charges, or interest rates in relation to residential mortgage products affected.

However, YBR’s Mr Kirkpatrick believes the ACCC alone may not have enough power to prevent the big four from lifting their rates.

“But if you combine the strength of the customer bases, the government and the media, that is far more powerful than a single government body,” he said.

“Opinion is a big driver of behaviour. I think the first one to move will see customers vote with their feet. There are plenty of other alternatives.”

All Taxes Are Paid For By Everyday People

The following opinion piece by NAB Group CEO Andrew Thorburn was first published in the Herald-Sun on 15 May 2017: 

Australians make choices every day as to how they balance their own budget, managing their income with the bills they have to pay.

For a family that means if the price of groceries or electricity goes up, they have to decide how those costs will be borne. There is no magic solution to fill the gap – choices have to be made about what to spend less on, what things to go without.

It is the same for any business, large or small, such as a builder, a hairdresser or a coffee shop owner. If their costs go up (or they have more tax to pay), they too need to find a way to manage those costs against their income.

In reality the options are limited.

They can charge more for their services.

They can invest less in the training and development of their employees or make the tough decision to have fewer employees.

Or, as the owner of the business, they can accept less profit in return.

A bank is no different.

When our costs go up we must decide whether to reduce what we spend with suppliers. These include the people who own the properties we lease as branches and business centres; the agencies we pay to advertise our services or the companies that provide and help manage our technology

Or we can increase the rates we charge borrowers or reduce the rates we pay savers.

We must decide whether to invest less in new products and services, or less in our employees – all 34,000 of them who live and work in the communities they serve right across Australia

Or we can decide to return less to our shareholders. These are every day Australians who own shares in the bank either directly or through their super fund

Last week the Federal Government announced how it plans to balance the national budget. We agree on the need to return to surplus – but this must be done carefully and with long-term planning and consideration of the consequences.

So, while the new tax on the major banks might seem an easy solution, the fact is the cost of this tax will be borne by people.

That is because a bank is made up of the everyday people listed above: our customers – the savers and borrowers; our suppliers, our employees and our shareholders.

That is who “the bank” is.

In response to the new tax – $6.2 billion over four years, on top of the billions of dollars already paid by the major banks – it is wrong to state it can simply be absorbed.

The reason is simple. As any family or small business knows a tax is a cost, and a cost must be passed on somehow. No cost can be “absorbed” – even if a family or business is successful and doing well.

It is right to say Australia’s banks are strong and profitable.

And that is a good thing – because strong and profitable banks are vital to the health of any economy.

It means that we can continue to lend to Australian businesses to grow, and to provide loans to people to buy their own home. It allows us to pay our suppliers and our employees; and invest in our own business so we can be better.

But the vast majority of bank profits – in NAB’s case about 80 per cent – are returned to our shareholders twice a year in dividends (the rest is retained to invest in improving the bank and as capital to allow further lending).

So when people say the banks can afford the new tax and don’t have to pass the cost on, they must mean that the millions of retail shareholders – everyday Australians – who are the owners of our major banks can afford it.

For NAB alone, there are about 570,000 direct owners in our company. About 174,000 are Victorians who live in communities like Sunshine, Preston, Mildura and Warrnambool.

Another 161,000 people in New South Wales own shares in NAB, a further 84,000 Queenslanders, 71,000 West Australians, 34,000 people in South Australia, 8500 in the ACT, 6500 in Tasmania and 1500 in the Northern Territory.

Many of these are mums and dads, retirees and pensioners who hold small parcels of less than 1000 shares.

The income these shares pay – $1.98 in dividends for every share, fully franked, last financial year – help these Australians manage their household budgets.

Then there are the millions more Australian workers with superannuation who own shares in the major banks through their super fund.

This new tax will hit all these groups. For all of them it represents a potential pay cut, now or in retirement.

Banks exist to serve and support their customers – the borrowers and the savers. They provide jobs to more than 150,000 employees, and work and opportunity for countless suppliers. They are owned by millions of every day Australians.

The cost of this new tax will be borne by all these people.