Friday, 24 February 2017

Company tax rate cuts in Australia and the banks that benefit

There has been some finger pointing in mainstream and social media of late over Labor’s use of $7.4 million as the amount banks would be able to retain under the Turnbull Government’s progressive cuts to the company tax rate included in the 2016-17 Budget.

According to the Australian Tax Office on 3 January 2016:

The government announced a reduction in the small business tax rate from 28.5 per cent to 27.5 per cent for the 2016–17 income year. The turnover threshold to qualify for the lower rate will start at $10 million and progressively rise until the 27.5 per cent rate applies to all corporate tax entities subject to the general company tax rate in the 2023–24 income year.

The corporate tax rate will then be cut to 27 per cent for the 2024–25 income year and by one percentage point in each subsequent year until it reaches 25 per cent for the 2026–27 income year.

ABC News reported in May 2016 that Treasury Secretary John Fraser told Senate Estimates: The cost of these measures to 2026-27 is $48.2 billion in cash terms.

So where did the $7.4 billion for banks come from?

Australia is thought to have four big banks – the National Australia Bank (NAB), Commonwealth Bank (CBA), Australia and New Zealand Banking Group (ANZ) and Westpac (WBA) and it appears that this amount is based on projections done with regards to these banks by think tank, The Australia Institute.

The Australia Institute, media release 2016:

Big 4 banks $7.4 billion budget gift

The Coalition Government’s business tax plan would deliver $7.4B to the big 4 banks.

“Cutting company tax rates delivers a massive windfall to an already highly profitable banking sector,” Executive Director Australia Institute, Ben Oquist said.

“It makes no economic or budget sense to deliver the big 4 banks a multi-billion dollar tax break when Australia already has a revenue problem.

“If your agenda is jobs and growth, targeted industry assistance would deliver a much greater return on investment,” Oquist said.

The value of company tax provisions was derived from 2015 full year annual reports for the big four banks. That figure summed to $11,123 million. That figure was projected forward to 2026-27 to give the no change scenario.

The projection assumed bank profit and hence tax payable would increase in line with nominal GDP. The nominal GDP projections used the figures in the 2016-17 budget papers which give nominal increases of:

2.5 per cent in 2015-16,
4.25 per cent in 2016-17, and
5 per cent in 2017-18 and subsequent years.

Company tax cuts do not affect the big banks until 2024-25 when the current 30 per cent rate will fall to 27 per cent for all companies with further reductions of one per cent per annum until they reach 25 per cent in 2026-27.

The results of this are presented in the following table:

Table 1. Benefit of company tax cuts for big four banks, $million
Savings on company tax

KPMG stated in Major Banks: Full Year Results 2015 that the Australian major banks reported another record earnings result in 2015 - a combined cash profit after tax of $30 billion.

By year’s end 2016 the major banks were reporting a combined cash profit after tax of $29.6 billion.

The Federal Government’s underlying cash balance for the 2016-17 financial year to 31 December 2016 was a deficit of $33,025 million and the fiscal balance was a deficit of $31,143 million. While net government debt for 2016-17 stood at an est. $326 billion.

There is an increasing global perception that banks put shareholders’ and executives’ interests ahead of their customers and the community. This perception is more real for banks than for other corporates as they are seen to rely not only on compliance with strict regulation, but increasingly on the goodwill of the community and government to continue to operate in their current form.

We are seeing heightened scrutiny of Australian banks, including through the recent Standing Committee on Economics (the Committee) inquiry, becoming a regular feature of media and political commentary, notwithstanding eight separate inquiries since 2009. There are many reasons for this increased level of oversight, with terms such as “trust deficit” and “trust gap” often cited as the root cause.

It has been argued that the financial services industry has lost touch with the core proposition customers are seeking by forgetting its real purpose in society and becoming too inwardly focussed. These themes were repeated in testimony to the Committee.

Readers can make their own minds up as to whether banks have lived up to the historic social licence granted them by community (see bank scandals since 2009 and alleged superannuation owing in 2017) and, if they actually need any further tax relief or if that $7.4 billion would be much better in the hands of the Commonwealth Treasury.

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