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Budget changes will crimp bank earnings
The projected net profits and earnings per share of banks, and most companies, will have to be trimmed, with confirmation in last week's federal Budget announcement that the rate of company tax will remain at 30 per cent.
A cut to 29 per cent had been outlined as part of the tax reforms connected to the introduction of the resource rent tax.
Banks in Australia paid an effective tax rate of around 25 per cent last year.
The tax saving that banks and investors may have budgeted for is worth a little under A$400 million a year.
The second shift in tax policy in the budget is that the proposed 50 per cent tax discount on interest earned on the first $1000 of interest income in any year has been scrapped for good.
The scheme was first announced by the Australian Government back in May 2010 and was to have taken effect in July 2011. It was then put back a year.
In November 2011 it was pushed back yet another year, with a target starting date of July 2013.
The rationale for the tax incentive has been overtaken by the surge in deposit inflows into banks as households consolidate their changed savings behaviour. Dropping the tax discount also saves the federal budget more than $500 million a year.
The planned reduction in interest withholding tax (which mainly benefits foreign banks) will proceed as planned.
One piece of good news for banks is that companies will be able to carry back tax losses, a measure that may improve the creditworthiness of many companies.
Companies will be allowed to claim losses against earnings in previous years. Aimed at small business, the benefit will be worth up to $300,000 a year.
In the 2012/13 financial year companies will be able to claim losses of up to $1 million against tax paid in the previous year. From the 2013/14 financial year companies will be able to carry their losses back over two years.
Under the current system losses must be carried forward and claimed against future earnings. The Business Tax Working Group advised the federal government that a carry-back system would offer business a greater incentive to invest.
Lenders are among those that stand to gain from such a reform. The poor cash flow situation that many companies suffer because of the current treatment of losses limits their ability to service debt.
