Bank GST tax an option

More than ten years ago, as Treasury worked out the detail of the decision to implement the goods and services tax in Australia, banks were left out of the GST net.

As with other countries with a value added tax regime, tax authorities in Australia found it pragmatic to have banks and some financial services companies simply pay the tax on the inputs they purchased rather than force the industry to address some of the impediments, such as the difficulty in working out which fees applied to which services in a sector where products (such as transaction banking, cash management and saving) are bundled.

To that extent value in bank services embedded in the value of final consumption (which the GST is intended to tax) is mishandled by the current system.

A decade later this is largely a forgotten curio of Australia's tax arrangements. Yet circumstances might be forcing a shift in the treatment of banking under the GST.

One driver is the everything-tax-on-the-table review being conducted by Treasury. The second is the global recession.

With the Australian, and Labor, cabinet hunting for new tax options and some serious additional revenue, this anomaly may prove a fertile option.

The position of the Australian Bankers Association has moved on somewhat since the late 1990s, when the industry association supported, though in a rather abstract way, the application of the GST to banking.

In its submission to the Treasury review of the tax system the ABA suggested the GST apply to banking and financial services.

The ABA also, optimistically, argued that if this were so, the tax be zero-rated at least on business-to-business transactions - the same approach used in health and education where there is, in effect, no tax on value added.

The industry view is that zero rating will "alleviate distortions to investment and saving" and "aid simplification", meaning it will head off yet another drawn out compliance project.

The ABA also contemplated zero-rating of consumer banking services as well, though the main message of the ABA submission was to conduct a more detailed study in order to work out the best option.