Tuesday, 27 June 2017 06:01

SA Bank Levy - Fact or Crap

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With SA Treasurer, Tom Koutsantonis announcing in the budget recently, a state based bank levy, we examine his assertions in a game of "Fact or Crap"

1. Tom Koutsantonis asserts that a new tax on the banking sector will ensure 'the sector contributes their fair share'.  

The fact of the matter is that last year alone, the banking industry paid over $14bn in tax.  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.  In fact, banks paid 55.3% of all tax paid by Australia's top 200 listed companies.  Food and Staples retailing paid 5.4% and the Metals and Mining industry paid 3.8%.  Source of this information is special report published by Australian Bankers Association.

Therefore we declare Tom Koutsantonis' first assertion is CRAP.

 

 

2. Tom Koutsantonis asserts that banks are earning super profits and therefore should pay more tax.

 

If banks in Australia truly were earning 'super profits' investors would clearly be able to see a material increase in financial ratios such as bank margins, and return on equity.  The first chart shows return on equity over the past 30+ years.  If banks were earning super profits this graph would show an increased return on equity, whereas the fact of the matter is that return on equity has been relatively stable over the past 30 years.  And while Australia's banks are profitable, this is something that Australians actually benefit from not only in their superannuation fund investment returns, but also having access to credit from a stable financial system to purchase houses, cars, businesses etc.   

The second chart shows the journey of bank interest margins over the last 20 years.  If banks were making super profits, margins would not be decreasing which is clearly what the chart demonstrates.

Tom Koutsantonis' second assertion is also CRAP.

 

3. Tom Koutsantonis asserts that banks should pay extra tax as they have closed branches.

We sourced information from the IMF Financial Access Survey (2015) which outlined the number of Commercial Bank branches per 100,000 adults and some of the key results are as follows:

 

Australia 28.7 branches per 100,000 adults

Canada 23.6

Germany 14.1

Greece 26.8

Netherlands 13.9

Norway 7.7

North America 28.2

OECD Average 23.6

 

Arguing an organisation which rationalises its physical locations should pay higher tax liabilities would result in some interesting tax outcomes for the likes of Book stores, Record/CD shops and of course Video rental shops that have all changed materially at the hands of technology.

Australia has one of the highest rates of bank branches to populations in the world, and it is with this in mind that we declare that Tom Koutsantonis' third assertion is also CRAP.

 

And for further interest from the same IMF report, Australia has 164 ATM's per 100,000 adults, providing ease of access to cash.  This compares to OECD average of 75.9 ATM's per 100,000 adults, further demonstrating that banks provide an above average service to Australians.

 

GEM Capital believes it is poor policy to single out an industry and impose a specific levy in a particular geographic location.  This is likely to distort the integrity of the tax system in Australia and lead to poor economic outcomes for South Australia.

 

We conclude this article by quoting some interesting sources who have shown their concern about the proposal to introduce a state based levy in South Australia on the banks:

 

"My concern is that it will damage investment.  It's quite a different set of circumstances from the federal tax".  "A state based levy could make the region uncompetitive" - Nick Xenophon, who is opposing the SA Bank Levy.

"There is no justification for this state tax other than a grab for revenue.  It is clearly open season for governments attacking big banks, but it is their shareholders who will bear these added taxes"  Ross Barker - Australian Foundation Investment Company

"In the case of South Australia the tax is avoidable by not doing business there and that's a very bad outcome for bank customers of that state" - David Murray former CEO of Commonwealth Bank

 "Koutsantonis shows his lack of understanding of the profitability of the banks relative to their capital by quoting the annual profits number..... and he might get a shock when they start shutting down local operations in Adelaide in response to the tax, which woul be a rational response"  Tony Boyd Australian Financial Review

"Australia is becoming a laughing stock of global investment circles as erratic governments - state, territory and federal - carelessly undermine confidence by chop and changing the rules of doing business" Jennifer Westacott - Business Council of Australia

 

GEM Capital is concerned at the anti-business messages the SA Government is promoting in this levy and believes it is highly likely to result in reduced investment in South Australia which is likely to result in reduced employment over time.  From an investment perspective, actions of Australian Governments like this are materially increasing "Sovereign Risk" of investing in Australia which is also likely to negatively impact the Australian economy over time.  It very much validates our view to look to continue to invest outside of Australia in search of investment returns.

 

These opinions are my personal views and not necessarily those of the Dealer Group we are licensed through.

 

 

 

 

 

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