COBA: Mutual banks taxed unfairly

COBA believes fairer taxes for customer owned banks will boost innovation and competition in Australia’s banking sector.

The Customer Owned Banking Association (COBA) has lobbied the government to make changes to the way customer owned banks are taxed.

They have proposed two major tax changes in a submission to the Federal Government – changes which they believe will promote greater banking competition and deliver more choice to consumers.

COBA CEO Mark Degotardi said the current tax system is putting an unfair burden on the customer owned banking sector.

“We currently pay a higher effective tax rate than our major bank competitors,” Mr Degotardi said.

“Measures contained in our pre-budget submission provided to Treasury would support a more competitively neutral framework in retail banking.

Mr Degotardi suggested that the Government’s positive response to the recent Financial System of Inquiry (FSI) blueprint had encouraged COBA to make these recommendations.

“COBA’s tax policy proposals will strengthen the capacity of the customer owned banking sector to take advantage of this more pro-competitive regulatory framework to apply genuine competitive pressure to the major banks,” he said.

“The FSI warned that the banking sector is concentrated and this poses risks to both the stability and degree of competition in the Australian financial system.

“We believe the modest and sensible measures contained in our submission will support the Government to deliver on FSI recommendations that are competition, consumer and innovation focused.”

What are COBA’s proposals?

COBA’s submission contains these two proposals:

  • Proposal 1: A company tax rate for customer-owned banking institutions that matches the effective tax rate of major banks of between 22% and 25%.
  • Proposal 2: An expansion of GST Reduced Input Tax Credit (RITC) item 16 “Credit Union Services” to cover mutual building societies and former building societies that are now mutual banks.


See how the customer owned banks stack up in our comparison tables.

Proposal 1 Summary

In their pre-budget submission, COBA points out that while customer owned banking institutions are subject to the same 30% company tax applied to listed banks, listed banks effectively only pay 22-25 per cent of that.

This is because of dividend imputation regimes whereby the final tax rate due on a company’s distributed profits is determined by the marginal tax rate of the shareholders. So, if the average marginal tax rate of a listed bank’s shareholders is less than the company tax rate (30%), the total tax paid on company earnings will be less than 30 per cent.

Customer owned banks don’t have the benefit of doing this because they don’t pay out dividends to external shareholders. They instead invest profits back into the business. Unfortunately this means they are subjected to the full 30 per cent company tax rate.

This problem was recognised in the FSI Final Report (published in November 2014). In it, it mentioned:

Mutuals cannot distribute franking credits, unlike institutions with more traditional company structures. This may adversely affect mutuals’ cost of capital, with implications for competition in banking.

According to COBA, a discounted company tax rate of 23.5 per cent for customer owned banking institutions in the year to December 2014 would have saved the sector around $41 million.

With only a collective market share of 10.1 percent, (fifth after CBA, Westpac, ANZ and NAB) this money could help customer owned banks to step up their competitive pressure on the major banks.

They could use the increased capital to expand lending and/or invest in technology and customer service.

Proposal 2 Summary

The input taxing of financial supplies (e.g. loans and deposits) under the GST gives larger banks an unfair advantage over smaller banking institutions. This is because insourced services (e.g. accounting services) used to make financial products are not subject to GST, and larger banks have a greater ability to insource. Small customer owned banking institutions don’t usually have the capacity to do this, and so are forced to outsource these services – meaning they effectively face a higher tax burden.

The 75 per cent ‘reduced input tax credit’ (RITC) was designed to address this problem, but it currently doesn’t cover mutual building societies and mutual banks that were formerly mutual building societies.

Along with credit unions, mutual banks and mutual building societies are also represented by COBA, so COBA are pushing for all of their members to be accommodated by the RITC rule. This would help customer owned banks to combine their efforts better to innovate and reduce transaction and product development costs.

COBA argue that this could bring new and better products to Australia’s retail banking market, putting even more pressure on the big four.


Image credit: iStock | Kokkai Ng
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