The Major Banks Levy is is forecasted to raise more than $6 billion over 4 years.
It will affect banks with liabilities above $100 billion. Currently this includes the four major banks (ANZ; Commonwealth; NAB & Westpac) as well as Macquarie Bank.
To me, the interesting elements of this announcement really fall in to two categories. These are:
(a) the industry and media response; &
(b) as shareholders (whether directly or via our super funds) should we be worried about the cost of this to the profit of banks
Industry & Media Response
I have been surprised that a likening of the Major Banks Levy to the Mining Tax has not been made.
Instead, I have heard comments such as those made by the Australian Bankers Association Chief Executive Anna Bligh that this measure could threaten the stability of the financial system. And the morning after the Budget there was the response from some in the banking sector that they would recoup the cost and pass it on to consumers. In my humble view, some of these comments do more to threaten the stability of the financial system than the Major Banks Levy does!
Wouldn't it be refreshing to see one of the Major Banks come out with a press release that said they accept their corporate responsibility to the society that has made them such wealthy organisations and confirm that they will not pass on the cost of the Levy, and that they are open to new clients and hope that the support of new clients will help them defray this Levy?
Impact as a shareholder
It is projected that the levy will cost the big four banks between $300M to $400M each per year.
The share market did what it normally does, and over-reacted to this news and wiped billions off the value of the major banks.
But this is an over-reaction because the Budget also confirmed the government’s intention to legislate the rest of its $48bn 10-year company tax cut plan. Although recently passed legislation starts the tax cut only for businesses with a turnover up to $50 Million, in April the Treasurer Scott Morrison said the government will present legislation for tax cuts for larger businesses when it believes it has the support of the Senate.
Modeling conducted by the Australia Institute (see table below) shows that the proposed company tax cut would save the same big 4 banks approximately $2 billion per year (based on 2015 figures), rising to over $3.4 billion per year in 10 years’ time!
So, the net effect of the Major Banks Levy plus the Tax Cut would actually be positive for the banks concerned!
Table 1 Amount of Tax cut planned for individual companies.
