Australian Government Planning New Bank Tax

By Global Tax Weekly

In the current political climate, with the financial crisis still fresh in the memory (even though the height of the crisis was almost a decade ago), political parties can almost certainly expect to gain some votes with proposals to impose higher taxes on banks. At the very least, it’s hard to imagine such a policy being a vote loser. But what is politically popular doesn’t necessarily equate to effective tax policy.

Some would say that the banking sector got off very lightly for its role in creating the financial mess that still hasn’t been fully cleared up. But governments have to be very careful in how they structure additional taxes on banks, because as the Australian Bankers’ Association warned in response to the recent announcement of a new levy on Australia’s five largest banks, such measures can have “unintended consequences.”

Poland is a good example of a bank tax went wrong. While the 0.0366 percent levy appears miniscule on the surface, it applies to banks’ assets, which economists have warned could reduce credit supply and suppress economic growth. Indeed, such vaunted institutions as the International Monetary Fund and the European Central Bank have lined up to criticize Poland’s bank tax, with the latter warning that it could have a negative impact on financial stability.

Australia’s bank tax is structured differently, with the levy based on liabilities rather than assets. But problems are still foreseen. Despite the fact that the levy targets Australia’s largest banks, the nature of the banking business means that it is likely to affect the whole banking system, and it is expected that the tax will simply be passed on to borrowers and depositors.

Compounding the issue, the Australian Government appears to be in an urgent rush to push the bank tax legislation through. According to the Australian Bankers’ Association, industry representatives heard about the Government’s plans at a meeting with Treasury officials only on May 10, and they were given until midday on May 15 to make submissions on the proposals, two days before the Treasury had planned to release draft legislation. No doubt some midnight oil was burnt as civil servants worked to draft the bill in such a short time frame. And this is hardly ideal preparation for an important piece of legislation. A case perhaps of legislate in haste, repent at leisure.

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