A call for a Super Profit Tax on Banks

A call for a Super Profit Tax on Banks similar to a call for Gas Company treatment has been made in an Opinion piece in the Guardian. I agree that large profit taking should be under Tax treatment review. How do others feel?

The writer of the opinion piece just had an interesting interview on the ABC Business segment about Cryptocurrency.

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Well, these bank ‘super profits’ are returned to shareholders, be it direct holders, or indirect through funds like superannuation or unit trusts.

They are largely after-tax, so the big banks have paid billions to the Government in tax, and as such imputation credits are available to shareholders to avoid double taxation.

Normally I think Satyajit Das a credible commentator on financial issues. In this case I disagree with his argument.

In regard to his comments on cryptocurrency on TV, much better.

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First of all, “super profit” is propaganda. It has been around since the Rudd era. Secondly, “on banks” is good politics. Whether it is good policy is a different question.

Having a fixed corporate tax rate is generally a good idea because it is too easy for profits to flow around in a corporate structure.

Having a fixed corporate tax rate is generally a good idea because to do otherwise creates distortion in the economy.

Rather than increasing corporate tax on banks (which just looks like a tax grab), perhaps the banks should be “encouraged” to increase deposit rates (in a rising interest rate environment, and a point made in the article).

Regardless, as interest rates rise, a RoI of 10.6% becomes less significant. (I mean, in any economic environment, 10.6% is not outlandish or “super”.)

Rather than increasing corporate tax on banks, perhaps the government should look at how government policy is contributing to bank profits (failed competition policy, high immigration, money printing).

It may be valid to look at the percentage size of Australia’s banks relative to GDP but reducing the percentage by effectively reducing the size of the banks is not a very constructive solution. Diversification of Australia’s economy would be a smarter approach. Australia has long had a problem with a non-diverse economy.

In any case, the article states outright:

Structural reforms are needed. While superficially attractive, a windfall tax has problems […] A better approach would be fundamental reform of the sector.

In other words, a special corporate tax rate on banks would be seen for what it is: a tax grab by a cash-strapped government - and not good policy.

Essential financial infrastructure, such as the payment system, should be under national control

I think you know what I am going to say about that from a privacy point of view. I don’t have a problem with national control as long as the government doesn’t have access to any data whatsoever (over and above what it currently has access to) but who would trust the government on that?

As @gregr says, imputation credits are the big unknown on how a special corporate tax rate would work. Is the special corporate tax (i.e. anything above 30%) outside the imputation credit system? (in which case this is massive double taxation) Or is it inside the imputation credit system? (in which case it won’t make as big a difference as one might think) The Labour government should already know how the politics of tinkering with the imputation credit system play out. :wink:

My summary would be: yeah I get that the budget is shot but look elsewhere for ideas.

There are significant differences though.

Banks actually make real profits and pay real corporate tax (at 30%). The higher their profits, the more tax the government gets already. (Banks are also largely Australian owned. So, whatever is happening, most of the money stays in Australia.)

Resources companies, due to high up-front capital costs, often don’t make profits and don’t pay corporate tax. (They do of course pay royalties - if it’s on land, to a state government - if it’s in the sea, to the feds.)

Resources companies are using up non-renewable resources. Banks are not.

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Possibly a misconception perpetuated by those businesses to make us all feel good about using their services?

Foreign investment in Australian business/companies is very significant. One side of politics says we need that investment because we can’t fund it ourselves. The other likely thinks the same. Of course much of the current value is not new capital invested into the business, but the result of one shareholder selling to another against the prospect of future growth plus earnings. We seem to be a popular for foreign ownership. Are they genuinely adding cash to the Aussie economy or speculating?

The big 4 banks ownership varies from ANZ at just under 76% foreign owned up to Westpac at 84%.

It’s a matter of curiosity that with a Market Cap of $2.4 trillion (Oct 2022), is substantially less than total value of super of around $3.3 trillion.

It’s a serious question that cuts to the core. Whether Australia genuinely benefits or Aussies should commit to owning more of “the farm”?

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Interesting data. I may stand corrected.

On the other hand, I wonder about their methodology. The table says that Telstra is 51% foreign owned but Telstra says that by law (legislated) it is limited to 35% foreign ownership. Same problem with Qantas. The paper explicitly acknowledges this but without resolving the discrepancy. The paper acknowledges the difficulties of establishing the ultimate beneficial owner.

Since it was a parenthetical aside in my post, maybe I should just withdraw that comment - but I won’t go back and edit it as that would be unnecessarily confusing.

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These would be maximum percentages assuming that Australians don’t have interests in the foreign investment funds investing in the ASX. Australia does which means the percentages can’t be relied upon as fact. The actual percentages will be less as the investment industry is investments within investments to create diversity of investments.

For example, it is highly likely the Australian banks themselves will have interests in foreign investment businesses which in turn have interests in the banks. Similar applies to Australia super, managed funds, LICs etc. This is why one can’t purely look at major shareholder listing to extract foreign ownerships as interpretation of such can give a false impression. These lists are often used for political reasons. One also needs to look at where businesses have investments and other interests, both local and foreign.

The above explains part of the discrepancy. The other components is Australian run investment houses with foreign names being separately owned to foreign ones. A bit like how Coca Cola used to be. Or a foreign named business where a the principal shareholder is foreign with major ownership being other shareholders/owners including Australian.

It is highly complex and using raw major shareholder lists is a misrepresentation of the reality, often for political reasons.

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Maybe. But it wasn’t a core part of my post, so I have gone back and struck it out !!!

The actual post that I was replying to was about taxation of banks, not ownership. (Ownership does matter if we were to look at wider taxation reform but that might be too big a can of worms.)

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Why is it a misrepresentation?
Why is it not real?
Is it not the work of professional analysts to be capable of understanding complexity?
Is it appropriate that they take complexity and present it after analysis in a way we can all understand?

It’s an aside as @person indicated. Apologies if it has stirred a negative response to say it isn’t reliable and therefore a mistruth. The overall position is that the largest companies/businesses are majority foreign owned remains solid and based on good data. There are two independent sources. One from Bloomberg and the other the ATO.

The correspondence in these results gives us the confidence to say that Australian big business is foreign owned by around 79 to 80 percent.

Even as Australians if we have some interest in an overseas managed equity fund, EG Blackrock, that has some investments in Australia, it’s Blackrock which has control and decides how to draw on that wealth.

The Australia Institute research also also looked at the bottom-up data using ABS data and investments held by Australians including companies not in the top 20.

Excluding unincorporated small business it looks like the bottom-up calculations get us to a figure of 30 percent identifiable Australian ownership. Given the likely bias in foreign investment towards big companies the estimate of around 79 or 80 percent foreign ownership seems to be reasonable for big business.

If there is complexity to be considered it’s the many different ways any change in how companies are taxed can flow through to foreign investors. Will it affect Australian investors? Direct investment by Australian’s in Aussie companies comes with the offset of franking credits. Investing indirectly through overseas based trusts in theory offers none of those benefits. It’s difficult to see as a result how it’s effective in respect of tax benefits, nor capital gains given the structure of CGT for personal Aussie investors.

Apologies if it’s only an aside. It is material to any discussion of applying a super profits tax to know just who will be most impacted. In respect of dividend earnings there is a clear option to provide imputation benefits (which only flow to Aussies) based on the higher tax rate. The ATO will know just how this works out as will each listed Company through it’s registry and provisioning.

It’s more worthy of review than rebuke.

Likely worth opening further, given the current boom in corporate profits in contrast to losses in consumer purchasing power. More so for the significant numbers of consumers already on a financial knife edge.

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I didn’t disagree that some major Australian businesses have major/majority foreign investment/ownership.

The comment I was making was relying on major shareholder lists is an oversimplified analysis of Australian/overseas ownership. There is more scrutiny needed than solely using a shareholder list, as it will over-estimate foreign ownership.

In relation to control and decision making for investing, control is very different to ownership, and the two shouldn’t be confused. In some businesses employed personnel with authority make investment decisions. These employees aren’t shareholders nor owners. There has been public cases when such decision making hasn’t been in the interest of the organisation and fallen foul of the authorities. This is one such infamous example.

In relation to super-profits, I see merit in applying windfall type taxes where large, unexpected profits occur through isolated events benefiting a business. They should be called windfall taxes and exist only when a temporary windfall occurs. Gas profits, for those businesses not locked into fixed price contracts, is a good example where wealth should be shared by the original resource owner (that being the ‘Crown’). Gas businesses have benefited when their costs remain stable, but prices have unexpectedly escalated through a world event outside their control. Such commodity price increases were never anticipated (or factored into operations) by the businesses, market or shareholders.

For banks, these aren’t windfall type profits. They are successful and profitable busineses. If a government applies super-profits tax to a successful and profitable business may only result in businesses applying higher fees and/or margins to maintain NPAT, to the detriment of consumers. Differential taxing between similar businesses gives one business a competitive advantage over another, and may discourage productive or business efficiencies - these could also be to the detriment of consumers.

Another other factor is once governments get accustomed to using the super-profit taxes, most likely for general revenue, it will be unlikely they will ever be removed as it will substantially hit the budget bottom line. Possibly government should look at its own books before considering super-profit taxes on any profitable business.

Is there a fundamental difference between companies making ‘super profits’, which may be temporary, and individuals that may be making ‘super income’?

The previous Government, and continued by the current Gov, consider that the tax imposed on high income earners should be reduced.

I guess that companies don’t vote, but individuals do may have something to do with it.

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True. The relevance of which seems to vary depending on unexplained lunar phases, excluding election time.

Large corporates have significant financial capacity and organisation. Lobbying, direct access to government, political party contributions, and advertising/public preferences.

One only needs to look to which organisations are most often represented in the submissions to government reviews to ask whose interests are most strongly represented.
EG Corporate Tax Residency Review | Board of Taxation
Or very current, (submissions closing 01 Nov 22) - Global agreement on corporate taxation: addressing the tax challenges arising from the digitalisation of the economy | Treasury.gov.au

It’s a fundamental question whether any one of us should be paid more than anyone else for one hour of our time as a member of parliament, the CEO of Qantas, or driving the school bus run?
Whether equity should be shared equally between all or acquired disproportionately, the second is facilitated through our financial and business structures. I’ll leave it to others to suggest why those structures and disproportionate distribution of wealth have perpetuated.

It’s a useful question given the size of the national debt and support put in place through Covid, IE to lessen the burden on business/companies and consumers. For many large corporates and business overall it’s been a return to record profits. For consumers other than the relative minority with substantial equity investments, the current circumstances offer only increased costs of living.

Corporate taxation is one tool governments have to rebalance the relationship.

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But that is exactly what happens through the existing corporate taxation system. If a company has a great year and profit is 3x what it was the previous year (regardless of the reason) then it will pay 3x the tax that it did in the previous year. We do also need to be careful because profit becoming 3x could simply be a result of M&A.

There is however a big difference between targeting individual industries (sectors) and applying new rules to all corporations.

The originally proposed special corporate tax rate for banks raises the question of whether it applies only to the bank’s profits in the banking sector or to all the bank’s profits. In other words, if the bank has an insurance arm or a wealth management arm or … does the special bank tax apply to profits from those arms? Both answers have significant negatives and are likely to trigger (undesirable) behavioural changes in banks.

It might also raise the question as to whether it applies only to domestic banking profits or to global banking profits (in either case only to banks in Australia).

At the end of the day it doesn’t really matter what it gets called. (A rose by any other name would smell as sweet.) However the choice of name will reflect on the chooser i.e. how it is used for propaganda purposes. (As you yourself suggest, there is no such thing as a temporary tax. :wink:)

Someone might legitimately ask whether a given single company has increased its profits by e.g. 3x as a result of a windfall, or as a result of shrewd capital investment or shrewd M&A or shrewd contracts or shrewd price hedging or shrewd currency hedging or … - or any combination thereof. Since it will often be impossible to apportion the increase in profit exactly to specific causes, it is better not to bother.

How do you define “super profits” or “windfall profits” in such a way that the only result is not financial engineering?

Indeed. It is a reward for a less successful business, in a competitive market. That might be an acceptable reward strategy for kids in kindergarten but … :wink:

Who is to say? Any sensible business operating in the resources space would factor in the high likelihood of significant changes in market price, up and down. They would do that through sensitivity analysis. They would know what the minimum market price is for financial viability of a project (either at all or for a given desired RoI). Resources is a cyclical sector.

In respect of gas companies, Russia did invade Ukraine in 2014 (8 years ago), without military consequence. So I guess you could say that the subsequent greater invasion was able to be anticipated, as a possibility but not the exact timing. If a company had paid close attention to Russia and Ukraine, you might even have suggested that it is more than a possibility.

Anyway, a person might reasonably think that stratospheric gas prices are a good thing (a de facto carbon tax) as we try to transition away from fossil fuels. It’s the carbon tax the government can have without the political pain (provided that they are not silly enough to tell voters that they are going to reduce gas prices). :rofl:

I wish the government would take their 30% cut of the increased profits (banks or gas companies) and get on with the job of building the energy infrastructure that we need. To be fair to the present government though, the proposal for a special corporate tax on banks hasn’t come from the government.

That’s what royalties are for - but some will go to a state government and some to the feds.

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There is a difference between windfall taxes and oops we have to fix up previous policy failings taxes. Historically Oz has charged extractive industries very little for the non-renewable minerals and fuels they have exploited in comparison to other countries.

We had the mining boom of the nineties and while it improved our international exchange the royalties were comparatively low and were frittered away. We have the gas boom of the last decade yielding much less than it could have due to a raft of sweethearts deals.

Norway found a huge new gas field and now has a trillion dollar sovereign wealth fund. They had sensible royalties (that still allowed the industry to make a profit and employ people) and they stashed it away.

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Not without complaint, $40 million of complaint?
An amount few of us could every dream of spending, let alone spending to influence a business outcome subject to determination by an elected government.

Note the royalty increase only applies to the margin applied on coal sold for more than $300 per tonne. Met coal was selling for up to $545per tonne mid year.

It’s also suggested the increased royalty is a genuine disincentive to further investment in coal in QLD.

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Freedom of speech is a bitch, isn’t it? :wink:

This is the kind of thing that probably should have been avoided. Just increase the royalties unconditionally - and when the market price subsides again, as I suppose it inevitably will, decrease the royalties unconditionally.

It very well might. (I could be wrong but I think royalties apply without regard to profit.)

There are several factors with the quoted statement.

e.g. competitive federalism, where a unilateral increase in Queensland does put Queensland at a competitive disadvantage relative to e.g. NSW. The Queensland government would, if sensible, look at whether increasing the royalty rate increases or decreases the Queensland government’s total royalty income. And in a global context, whether it puts Queensland at a competitive disadvantage to other countries that export coal.

e.g. whether “disincentive to further investment in coal” is a good thing or a bad thing - that could easily be a controversial question. I mean, if you’re a coal company, I get it - but looking at the interest’s of the world as a whole, looking at the bigger picture.

Again, if you are the Queensland government collecting higher royalties, how much are you investing in the infrastructure for replacement energy sources? (If state governments don’t build the infrastructure themselves, are they going to be able to tax sunlight and wind in the future?)

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I generally don’t disagree with your points.

That is correct, and royalties are based on historical commodity prices. They are set so that it is still attractive for a mining/petroleum company to exploit the resource and consider price fluctuations over time.

If the current gas prices continue to be inflated into the long term, then royalties will eventually be changed to reflect this change. When commodity prices have short term (many months to a couple of years) spikes like that which is currently forecast for gas, these are anomalies and aren’t reflected in future royalty rates as the commodity prices will return to ‘normal’ levels. Adjusting long term royalty rates up based on spikes is a disincentive for exploiting a resource as it substantially changes the economics. As such, the ‘Crown’ loses any additional benefit of the price spike and all rewards go to the gas companies. Yes, they still get the same royalty based on production levels and taxes applied to profits.

It is possibly to have a tiered royalty rate like that which exists in some countries, but these are often played by business to reduce their royalty burden.

A short term increase in royalty rates/taxes on unexpected windfall type commodity prices (where costs of operations have not significantly changed), like that which exists currently due to shortages from the Ukrainian - Russian war, would still significantly benefit the gas businesses. This is so even with sharing more with the public.

No business would have forecast the invasion of Ukraine and the games Russia is playing with their own gas supply - and associated impacts on gas prices. Any business would have expected fluctuations in prices, but would not have forecast the pricing that currently exists. If they did, the business would be one to invest in as they are future tellers and can use it to protect their own interests.

While corporate taxes will catch some of the windfall, at least 70% of the windfall goes to the gas companies. Maybe a reasonable suggestion is meeting half way for a short term windfall would be fair under such circumstances, to share the rewards equally across the private and public sectors.

As I indicated above, governments should look at their own books before considering any additional taxes (or royalties) as any increased revenue shouldn’t be seen as a spending opportunity. More recently governments tend to spend everything in good times hoping the good times continue to roll.

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QLD coal royalty is tiered. It had not been adjusted for more than a decade. The option may have been to increase the lower tiers in response. This would have affected all sales. The alternative adopted was to add a higher tier which only impacts the marginal income above the $300 per tonne price point.

It’s not necessarily a spending opportunity. It’s also an opportunity to reduce government (public debt) all consumers benefit from. The Yin and Yang of political choice is for another place.

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A worthwhile question.
Queensland has retained ownership of its electricity networks and a large portion of its generating capacity. Wisely or otherwise, $62 billion, but being a government budget likely to need more. 70% renewables target by 2032 announced in landmark energy plan | About Queensland and its government | Queensland Government

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I see this set of posts just got moved. Maybe the title should be: “A call for a Super Profit Tax on Banks / energy companies” since much of the discussion has diverged away from banks to gas.

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If you make the bold step as taking Russia’s invasion as a given then I would claim that it is close to 100% foreseeable that there would be sanctions, sanctions being the primary non-military tool of protest by governments. So in that situation gas shortages are foreseeable, and hence gas price rises. I predict that the sanctions won’t end any time soon, so higher prices are here to stay.

I don’t think anyone would have foreseen Russia blowing up their own pipelines, if that is indeed what happened. However with sanctions in place, that destruction doesn’t actually make much difference to the gas price. Nord Stream 2 wasn’t even in use yet anyway.

I think for starters it would be necessary to know whether it’s on-shore or off-shore, because different governments have different levers to pull depending on that.

Let’s say “off-shore gas”. Then the feds get 30% of all the profit (not just of the so-called windfall profit) and the existing royalties. So in that situation, giving yourself more than that starts to look greedy, whether by increasing the royalty rate or by introducing a special corporate tax rate for the gas industry or both. (The states get nothing in this scenario.) Of course there is no right or wrong answer, only consequences.

It isn’t clear that doing things to increase the price of gas will have good political or economic outcomes. That’s why the present government hasn’t done anything yet. I think what they really want to do is cap the price of gas (which may then have the effect of decreasing government revenue, but could have good political and economic outcomes) but even that is fraught.

My armchair suggestion as the least bad option: A small increase in the royalty rate that is sufficient to transfer to those people in the bottom X percentile who are affected by the gas price in their energy bills.

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