Is Government considering a tax on excess bank profits, in disguise?

Saturday, 12 July 2025

Deja vu? The Bankers’ Association suggests the real reason for Australia’s major bank levy was to help fill a hole in Australia’s budget.

ANALYSIS: Could the Government really stick it to the banks next year?

There is still a lot of fog surrounding the recent revelation that Finance Minister Nicola Willis’ has asked Inland Revenue for advice on whether the amount of tax that banks pay is fair.

Willis played down the exercise, suggesting some of the matters officials would be delving into were highly technical and even “arcane”.

But what may most rattle the banks is that she has asked the tax department to “look at” Australia’s major bank levy, noting that is “something that we don't have here”.

The obvious implication is that is something that could change.

The Australian levy is 0.06% annual tax on the value of many bank liabilities — bank deposits mostly, in layperson terms.

That might sound trivial, but given the value of bank deposits it raises about A$1.7 billion (NZ$1.8 billion) a year for the Australian coffers, so no chump change.

Whether the levy could be described as a tax on excess bank profits is probably anyone’s call.

The levy was introduced by then Australian treasurer Scott Morrison in 2017, ostensibly to reflect what was assumed to be an unwritten assumption that the Australian government would need to bail out any of the country’s biggest banks in a financial crisis.

Given the big banks were “too big to fail”, a levy was an appropriate way for the banks to chip in during normal times to cover the future mess a failure might create — or so the argument goes.

But it could equally be seen as a simple tax grab.

Former Australian prime minister Scott Morrison unveiled the Australian major bank levy in 2017 when he was treasurer. It was quickly labelled a “tax grab” by critics.

Ken Henry, National Australia Bank’s chairperson at the time the levy was introduced, argued that if the government was really worried about banks failing, it would be better off letting them keep their profits so they had more capital and were less at risk.

In actuality, big banks haven’t topped the list of private businesses receiving bail-outs from the public purse in recent years in either country.

In New Zealand, that dishonour would go to insurer AMI (in the wake of the Canterbury earthquakes), finance companies such as South Canterbury Finance, Allied Nationwide and Equitable Mortgage, and — perhaps more forgivably — Air New Zealand in the wake of Covid travel restrictions.

Yet there appears to have been no suggestion any insurers or our national airline should be subject to a similar levy.

The fact Inland Revenue’s advice is being prepared in time for what will be the last Budget in the Government’s current term may heighten the suspicion that Willis is searching for a populist policy take to the election.

The Banking Association, which represents the banks, seems uneasy.

Chief executive Roger Beaumont says it’s not clear to the association what Willis’ thinking is on the Australian bank levy and it would be “happy to have that conversation”.

He suggests the levy, in Australia, was opportunistic rather than principled.

The Australian government said it was addressing “implicit government support in case of a bank failure”, he noted.

But in terms of what was driving the Australian levy in 2017, “you’d probably need to factor in what was happening politically”, he says.

“It seems the government of the day decided to impose a bank levy to help fill a hole in its budget.”

Here, banks are already chipping in to the cost of preventing or managing a future crisis, he suggests.

Roger Beaumont, chief executive of the Banking Association, says it’s not clear to the association what Willis’ thinking is on the Australian bank levy.

The Reserve Bank is raising banks’ capital requirements to “among the highest in the world” and the country has just brought in a depositor compensation scheme, paid for by the banks, to help protect people’s bank deposits, he notes.

Beaumont might also have made the point — but didn’t — that if it was fear of a bank failure that was motivating Willis to look into the possibility of a levy, that might seem to sit uneasily with the fact she has also been prodding the Reserve Bank to review bank capital rules, with a view to potentially loosening them.

But so what if the Australian levy is really just a tax on excess profits? Might it not still be worth copying?

Banks paid $2.6b of the total corporate tax take of $17b, last year, but that is merely a function of the fact that they have been extremely profitable, after all.

The argument against is that, from an efficiency perspective, an extra tax would be a poor substitute for measures that reduced bank profits by actually improving competition.

And the argument in favour is likely to be that while that may be true, improving competition is proving very difficult.

The Government has few tools to encourage investors to put money into smaller banks such as Kiwibank and, without a very big stick to wave, it is hard in practice to force the banking sector — or indeed persuade their customers — to rapidly embrace “open banking”.

Cheaper FX transactions on the way?

As it happens, ministers have one opportunity to strike a small blow for competition looming.

Money-transfer company Wise argued last year that the Government could score a quick win for competition by requiring banks to disclose their full foreign exchange fees and margins when converting currencies.

The company previously estimated in 2019 that consumers and businesses were paying banks about $1b a year in fees and “hidden charges” just to transfer money between different currencies.

Labour commerce spokesperson Arena Williams has now had a private member’s bill drawn out of the ‘biscuit tin’ that would require banks to prominently display the entire fee charged for international money transfers.

National Party MP Andrew Bayly signalled an openness to reform in the area when commerce minister last year, noting the Commerce Commission had identified “potential issues” in that part of the banking market and appeared open to taking action.

The Government is advancing a couple of bills that would impose new requirements on banks to act fairly and communicate better about the cost of their services.

But the wording is currently pretty vague.

It would seem a big stretch to argue those bills would impose the same sort of quite specific disclosure obligations suggested by Wise or proposed by Williams.

It is not necessarily an ‘either/or’.

But assuming the Government is asking officials to consider a bank levy that might come in at a similar rate to Australia’s major bank levy, backing Williams’ bill, or something like it, might have as much impact.