The big bank levy could be the key to curing two of the Turnbull government’s biggest headaches: its continuing failure to legislate for company tax cuts and the scandals now emerging from the banking royal commission.
Thomson Reuters Australia Senior Tax Writer, Stuart Jones, said that the bank levy could be increased by this Federal Budget to offset benefits that the beleaguered banking sector would receive from company tax cuts.
“They may look to extend the bank levy to pay for the Financial Services Royal Commission (FSRC). An immediate increase in the bank levy could help the government to decouple the banks from the company tax cuts,” Jones said.
“It might be enough to soothe the crossbench to get the company tax cuts through.”
Big bank problem
The flames of public outrage were fanned this week, with the banking royal commission hearing allegations of widespread misconduct, mistreatment and exploitation.
The controversy is making it increasingly hard for the government to champion its 10-year plan to gradually reduce the company tax rate from 30% to 25%.
“After the royal commission stuff started to come to light last week we saw some crossbench senators, who were just starting to be convinced to maybe pass the company tax cuts, now trying to link everything back to the banks,” Jones said.
“They don’t want to benefit the banks amid stories of lives devastated by inappropriate financial advice.”
Crossbench senators Derryn Hinch and Pauline Hanson, who control three votes, have said their support could be secured if the banks were excluded from the company tax cuts.
Treasurer Scott Morrison, however, continues to refuse their demands.
Meanwhile, independent senator Tim Storer has reaffirmed his opposition to the government’s plan, saying broader tax reform is needed.
“The company tax cut is relevant to all companies and, as such, I won’t be seeking a carve-out as proposed by other senators,” he reportedly said.
The two NXT (formerly known as the Nick Xenophon Team) senators could be coming around, but they continue to link their support to negotiations around energy prices.
The bank levy could, however, provide a compromise solution.
The annual 0.6% levy on Westpac, ANZ, Commonwealth Bank, NAB and Macquarie liabilities came into effect in July 2017 and was tipped to raise $6.2 billion over four years.
Back then, the levy was an important part of the Turnbull Government being seen to be acting on banking reform.
It was also key for plans to return the budget to surplus by 2020-21. In this year’s budget, however, the levy could help the government secure support for company tax cuts.
“Extending the bank levy could decouple the banks from company tax cuts,” Jones explained.
“The government’s already got the bank levy mechanism in place. They could calculate the sorts of benefits that banks will get from the company tax cuts, then put them through on top of the banking levy.”
As such, the big banks would not be excluded from the tax cuts, but they wouldn’t be ‘rewarded’ either.
Any tax cut benefits the big banks received could be offset — politically and financially — by the additional levy payments to fund the royal commission.
“Then the government can get back to the broader issue of all businesses, and the economy as a whole, benefiting from company tax cuts,” Jones said.
Jones suggested the government may also take steps in the budget to address the fallout from banking scandals more directly.
“The horror stories from the royal commission may see the government attempt to get on the front foot around the slow rate of compensation,” he said.
“That was a problem identified by FSRC this week where a couple had sold their house but the bank paid their compensation back into their super fund where they couldn’t access it.”
A legislative move could be to allow the early release of super as compensation for inappropriate advice.
“They’re already looking at that in terms of being able to compensate some victims of crime,” Jones said.
“Waiting for the final report of the royal commission is probably not an option for the government.”
So some sort of fast-track compensation could be required to help those who have had their lives devastated, Jones said.
“A budget measure could be the government creating an immediate fund to start paying compensation then using the banking levy — or some other levy mechanism — to claw that back,” he said.
More tax cuts?
Any wins for the government around securing company tax cuts would be likely to come on top of personal tax cuts this budget.
When we wrote last week, personal tax cuts were shaping up as a likely Federal Budget centrepiece.
In a surprise move since then, the treasurer announced he was dumping the planned $8.2 billion Medicare levy hike. It was due to start on July 1, 2019 but was stuck in the Senate.
“That makes it easier for him to justify handing out personal tax cuts with one hand, because he’s no longer taking an extra 0.5% Medicare levy with the other hand,” Jones noted.
While improved tax receipts have provided room for headline personal tax cuts, they may not apply until July 1, 2019.
“Announcing personal tax cuts is one thing, but getting them through the Senate is another,” Jones said.
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