Offshore bank investors asking 'Where does this end?': Andrew Thorburn
Australian Financial ReviewJun 23 2017 10:04 PM
James Eyers, Simon Evans, Phillip Coorey
London-based investors have warned National Australia Bank chief executive Andrew Thorburn that they consider Australia a less stable and less consistent economy for investment after the South Australian budget hit the big four banks and Macquarie with a surprise $370 million tax.
Speaking from London after meetings with investors, Mr Thorburn said the first 15 minutes of every meeting he had was dominated by questions asking what's happening in Australian politics. "These are significant, global investors with capital to deploy, and they are asking, how can a few companies within an industry be targeted like this?
"They are asking where does it end and can these taxes just go up and up?"
The cash-strapped West Australian government said it was considering following South Australia and imposing its own tax on banks. South Australia introduced its own state-based bank levy of 0.015 per cent on the liabilities of the big four banks and Macquarie in the state budget on Thursday to raise $370 million over the next four years. The tax comes on top of the federal bank levy on liabilities forecast to raise $6.2 billion nationally over four years.
BankSA pulled its sponsorship of the state government's post-Budget lunch in Adelaide on Friday, saying it "will not support the state government's budget", after BankSA chief executive Nick Reade labelled the tax a "disgrace" on Thursday. The bank said it was putting a plan to open a processing centre on hold with the potential loss of 150 new jobs.
The new state tax weighed on the shares of the big four banks which all lost ground on Friday.
Westpac Banking Corp chief executive Brian Hartzer backed Mr Thorburn's comments, saying the state's tax would confuse foreign investors in the banking sector about whether to provide the economy with funding and also raised questions about whether the federal government is fully in control of tax policy.
Westpac, which owns BankSA, is reconsidering its commitment to creating jobs in South Australia in the wake of the state government's bank tax, which sends a clear message the state is "not open for business", Mr Hartzer said.
"We have been huge supporters of South Australia we are one of the biggest employers in South Australia, we have been there for years and years," he told AFR Weekend.
"We have a long term employment commitment to the state, we have several major operation centres in Adelaide that support the whole country.
"It is really unfortunate that decisions like this call into question that sort of commitment."
Westpac employs more than 3,800 people in South Australia, including BankSA, and its operations and technology centres that support the rest of the Westpac group and BT.
An unrepentant South Australian Treasurer Tom Koutsantonis said on Friday the state would have to "wait and see" whether any of the big banks would engage in any retaliatory action, but he warned that if they did it would be completely unjustified.
"Are you asking if I think banks will behave in a way that's not in the interests of anyone else other than their shareholders, we'll have to wait and see," he said.
The tax was being put in place because banks made "super-profits" and collectively were under-taxed by about $4 billion a year, and had been closing bank branches as they made those vast profits, he said.
Adopting a bank tax would not have much impact on his state's share of GST revenue "so that's why perhaps it may be an attractive opportunity for WA", he said. "I understand the banks would be somewhat unhappy about the proposal being put forward, but I'm assuming that all state treasurers are looking at this now."
But the governments of Tasmania, Queensland, NSW and Victoria and all ruled out following suit.
The federal government rejects accusations from big business that its major bank levy gave the green light to such behaviour.
Asked about the Business Council of Australia blaming his government for "letting the genie out of the bottle", Prime Minister Malcolm Turnbull said the SA government was free to do as it wished - but would put itself at a disadvantage by going it alone.
"That's one thing to have a tax that covers the whole country, but when a state imposes higher business taxes within its own jurisdiction, is that going to drive investment, support, jobs within that state or is in fact going to make it less competitive?" Mr Turnbull said.
Ultimately, however, the Prime Minister did not condemn the move. "The states have taxing powers and they can raise such taxes as they wish and they do," he said.
Finance Minister Mathias Cormann was also circumspect. "It's a matter for them, it will be a matter for the democratic processes in SA," he said.
With global institutional investors saying the federal government's bank tax had caused them to rethink investing in Australia, and Mr Thorburn reporting concern from Britain, Mr Hartzer said he expected institutional investors would react to the SA budget by "scratching their heads".
"I was in London last week, and the response to the federal policy was pretty strident," Mr Hartzer said.
Investors made the point they have choices about where they invest in the world, and what they had liked about investing in Australia is stable government, regulatory and tax environment, along with its well-run companies, he said.
"This sort of uncertainty is a big weight on investors' willingness to put capital to work in Australia, and ultimately that is a bad thing for the Australian economy, and it is bad for jobs."
Mr Thorburn said NAB investors were "asking where is the growth coming from in Australia, what's happening to drive activity and growth in our economy. As a result they're saying the environment in Australia is a less stable, less consistent and they have less confidence in Australia as a place to invest."
BankSA has been "heavily engaged trying to be supportive of the South Australian government, and parties of both sides, in helping South Australia to recover from the very difficult situation it is in," Mr Hartzer said.
"It is very unfortunate the government has chosen to go down this path and that makes us have to rethink everything we do."
In an attempt to stop the tax, banks have retained law firms and constitutional senior counsel to consider a case that could focus on the potential for inconsistency between the state's law and federal banking legislation. Asked to confirm whether the banks will conduct a constitutional legal case to challenge the tax, he said it was too early to say but confirmed Westpac is "considering our position".
The South Australian budget had also raised questions about whether the federal government is in control of the nation's taxation powers, Mr Hartzer said.
"The South Australian change also raises the question about who controls tax policy in this country. That is a whole new level of uncertainty.
"This country has a current account deficit - that means we borrow overseas to fund the Australian economy. Anything that adds to uncertainty and investors' willingness to provide debt and equity in to the Australian economy is ultimately a bad thing for jobs and bad thing for growth."
Banks seek constitutional advice on SA tax
Australian Financial Review Jun 23 2017 5:00 PM
James Eyers, Simon Evans
The big banks are hiring constitutional lawyers to prepare to challenge South Australia's shock bank tax but the state's Treasurer said on Friday he was on firm legal ground.
Bank general-counsels and legal teams have been scrambling since the new state bank levy was announced on Thursday to raise $370 million over the next four years, piggybacking on the federal government's own bank levy.
The SA levy is for a 6 per cent share of bank liabilities subject to the federal tax, equivalent to the state's share of the national economy.
In an attempt to stop the impost, several banks are in the process of retaining external law firms with public law expertise and constitutional senior counsel, according to sources in several banks. It is understood any case could focus on the potential for inconsistency between the state's law and federal banking legislation.
But South Australian Treasurer Tom Koutsantonis said on Friday he wasn't concerned about a potential legal challenge and the state government's legal advice was sound.
"Our legal advice and our independent constitutional advice is that we're on firm ground," Mr Koutsantonis told reporters.
He also said Prime Minister Malcolm Turnbull was wrong to say the state-based bank levy would damage investment in the South Australian economy.
"If that's true for the Prime Minister to be judged accurate, that means he's made Australia less attractive to invest in with his bank levy himself," Mr Koutsantonis said.
The banks' consideration of the Commonwealth constitution as a weapon against the South Australian government to defend themselves from the impost of state taxes was welcomed by constitutional law experts.
"So they should investigate. If I was in their position, I would be looking very carefully at this," said George Williams, the Dean of Law at the University of NSW.
"There are possibilities for challenge you would expect they would investigate. But ultimately it will depend on specifics of the South Australian law."
Lawyers retained by the banks will not be able to give actionable legal advice until the South Australian government produces legislation to give effect to the tax, as it would be the wording of the law itself that would be subject to any legal challenge. This would be ultimately determined by the High Court of Australia.
Sections 109 and 90
UNSW's Professor Williams said any potential legal challenge would likely involve two areas of the commonwealth constitution.
The first would be section 109, which invalidates a state law that is inconsistent with a federal law.
Lawyers will therefore be investigating whether the federal government's bank levy legislation - or any other commonwealth law involving banking - specifically, or implicitly, "covers the field" regarding the levying of an excise on banks.
"If there is a direct collision, then state law will be stopped," Professor Williams said.
However, he said the banks would have to wait and see the state law because if it ever hit the courts, the case would be determined by the specifics of the statutory language.
It might also be assumed that the South Australian government would have researched the federal landscape, he added.
"The state would be aware of all the federal statutes, and would presumably draft the law in a way that it can operate concurrently. Presumably South Australia has done its homework and thinks there is a gap and looking to fill it," Professor Williams added.
The highly-paid external legal teams and barristers working for the banks will also explore other avenues for a constitutional challenge.
Another potential case would be under section 90, which gives the commonwealth exclusive power over customs, excises and bounties.
However, this has been interpreted by the High Court over the years to give the commonwealth a monopoly on levying taxes on goods - but not on services.
Legal sources said it would be likely that banking would be considered a service and the success of any case under section 90 could not be determined until South Australia publishes the law.
The banks may also explore avenues via section 92, which states that trade within the commonwealth must be free.
The commonwealth has a power in relation to banking in section 51(xiii) of the constitution but this does not mean that it is an exclusive power which prevents state legislation. Because the section 51 banking power is known as a concurrent power, the roles in it can be conducted by both federal and states governments. However, should there be an inconsistency between their laws, then under section 109 the commonwealth law prevails.
Koutsantonis unrepentant
Mr Koutsantonis said on Friday the big banks should stop attacking the state. "Quite frankly I think the banks should be a little less emotive about their arguments and stop attacking the South Australian economy," he said.
He was unrepentant after a barrage of criticism on Thursday night from top bankers, including ANZ chief executive Shayne Elliott. Mr Koutsantonis said the big banks had been under-taxed by about $4 billion since state-based taxes were stripped away and the GST introduced. "They are the most profitable banks in the world," he said.
Another constitutional law expert said on Friday that because the states do not require specific heads of power to be able to legislate, so long as their laws don't conflict with the commonwealth's, courts will allow them to legislate on a wide range of areas.
Historically the states have wielded broad taxation powers, including income taxes.
The expert said it has been the federal government's use of its funding advantage as delivered by the nation's 'vertical fiscal imbalance', that has resulted in most historical state taxation powers being removed, rather than legal challenges. That is, the commonwealth has typically threatened to reduce the grants it makes to the states - for example, under the Goods and Services Tax - in order to make a state remove a tax it does not support.