Transcript No. 67

Hon Peter Costello MP

AM with Matt Peacock

Monday, 30 November 1998

8.00 am

SUBJECTS: Banks, Tax Reform

Mr Costello it would seem inconceivable to most Australians, I guess, that if our four existing banks became two big international ones there’d be more competition. Is that a view that you agree with too that there wouldn’t be?

Well there wouldn’t be in the current climate and in the banking landscape as we currently understand it. The Government said that it would not allow any mergers between the big fours and as you say big four would most probably merge down to big two. Unless we were convinced that there were new institutions that were coming in that could engage in business of business lending and could force margins down. Now although we have seen some developments, you’ve seen the AMP given a banking license, you have not seen major new entrants come into that area of the market and grab market share and put pressure on the banks. So in the situation as we find it now, as I said yesterday, you can’t conceive that allowing mergers would improve competition.

What’s needed there, I mean we’ve seen some developments with the Local Government Association, the Bendigo Bank moving into the bush where others have moved out. I mean what sort of incentives or what sort of conditions do you think are needed to see more activity in business lending?

Well there are a couple of things that prevented full on competition to the banks in the past. The first was that the banks had their own regulator, the Reserve Bank of Australia, which was perceived to give banks much more stability out of prudential regulation than other institutions like building societies and credit unions. First thing that we announced as part of our new financial reforms was the establishment of a prudential regulator which could regulate all deposit taking institutions. So that gave the opportunity for other institutions to come in under the one regulator and to take the banks on with the same prudential underwrite arrangements or at least the same regulator giving those arrangements. The second thing we announced that we would do is that we would open up the payments system. In the past it was only banks that were privy to the payments system with the use of cheques. We’re determined to open that up to allow credit unions and other institutions to come in. So we have knocked down a lot of the regulations that were giving banks their own special advantages with the view of encouraging other institutions to come in and start competing.

But it’s still not enough?

Well these reforms only took place after our Government was elected and in relation to getting some of the State regulated institutions under the national regulators. There’s still work that has to be accomplished and completed. And the next thing we did is we gave a bank license to the AMP. The AMP has never been in the banking business before, it’s a very large financial institution so that gave another kind of institution the opportunity to come in. Now as I said….

It’s still not enough in business.

Still not enough, still not enough, still not enough. But you see what you’re doing is you’re breaking down these barriers that have given banks the position they have over hundreds of years, as you break them down you’re going to find new institutions emerging and that’s what we want to encourage.

But we’ve seen that with home lending, why not with business?

Well the technical reason in relation to business is that the banks will say to you that business involves credit risk and it requires a new kind of person to work in the bank. But I think over time you’re going to find other institutions that can do that and if we do, if you can get better business loans and new institutions then you can get a more competitive market.

The bottom line though of your position as restated at the weekend is that the National Australia Bank is liable to go overseas to spend its money, isn’t it?

No, that’s not the case. As I also said at the weekend we encourage Australian banks to engage in overseas business and NAB has been successful at it and that’s good for Australia. What we’ve got to make sure we do in Australia is we have a competitive taxation regime so that it pays these banks to bring their overseas income back to Australia, rather than take their Australian headquarters overseas. Now this is all part of taxation reform, those people who sit around and say well don’t change the tax system are the people who are running the risk of seeing a flight of good companies out of Australia, which we don’t want, or even worse a flight a good people out of Australia which we don’t want unless we address income tax.

It’s not just tax, is it, I mean NAB has to grow and it has to go overseas to do that?

But it can do that from here. It’s buying banks in America and other Australian banks have bought banks in England and in the subcontinent of India. You can do that from Australia but as long as you’ve got a competitive business regime in Australia where it pays you to stay in Australia and bring those foreign business income streams back through this country and that’s what taxation reform is all about.

Well of course we will still have to hear whether or not payroll, or business tax does drop to 30 per cent but just on your GST legislation in Parliament this week, any surprises for example is that Tax Commissioner going to have extraordinary powers to clamp down on evasion of the GST?

Well we are going to have a new system which will help compliance. Each Australian company’s going to be given a business number and it’s the only business number they need. At the moment you can have one number for your company number and another of your workers’ comp and another for your tax file. We are going to have one number and the one number system will allow the Commissioner to police both GST and company taxes which will give us the opportunity to pick up the black economy in a new way. Why do I talk about picking up the black economy? The truth of the matter is that if you pick up the black economy and you bring more tax into the system from those that are currently avoiding it, honest taxpayers will be able to get tax relief. That’s a big part of this policy, tax relief for honest taxpayers and in particular lower personal income taxes.

Okay, now you’ve got the Vos report that you will be, I understand, briefing backbenchers on at the moment today, in that it studied some of the areas impacted by the GST and one of the most vocal areas you might say in terms of its impact is the charities in Australia.

Have you underestimated the sort of impact that the GST might have in terms of not only the GST but also compliance costs and the fringe benefits tax?

Well there are two separate areas. There’s indirect tax and there’s fringe benefits tax. If I can do indirect tax first. Under the GST system a charity is GST free, it gets back very single dollar of indirect tax it pays and indeed gets back all the indirect tax which is embedded into things that it buys at the moment. A charity does better under this system than it does under the current system.

That’s including charities that are businesses as well?

In relation to its non commercial activities generously defined, a charity does better. If a charity wants to go into business, it wants to go into a commercial business then its got to compete on equal terms with other commercial businesses. But charities do better under the new tax system, their costs fall under the new tax system from the current tax system. There’s the second area, of course, where the charities have been able to pay benefits and because of their income tax free privilege status have been able to get away from the fringe benefits tax. This has not been fair and the rule which the Government has announced is you can pay $17,000 in fringe benefits and get a tax advantage. But you can’t cash out more than $17,000 of an employees salary. Now I mean that’s pretty fair to give a charity a break of $17,000 where employees in a normal business wouldn’t get it but if they give more that $17,000 in fringe benefits, then they’ll be taxable in the normal way. Let me point out this though that the charities say oh well we are giving a lot of fringe benefits at the moment. I don’t think they should be, I think they should be treating their employees the same as normal employees but in any event the employees of charities are going to get tax cuts. What this package is all about is lower personal income taxes.

Of course you’ve got another five months of Senate scrutiny of your legislation, who do you think is going to be the easiest of deal with Meg Lees or Brian Harradine?

Well you see the way we look at it, the Australian people should be the people that determine these issues and they have.

You said that before and of course we now have the inquiry you didn’t won’t, I mean reality is that you’ve got to deal with Meg Lees and Brian Harradine?

Well, when you say, Matt, it’s an inquiry what’s the inquiry going to say? Four committees chaired by the Labor Party each of which are going to say we’re against tax reform. So let’s not get to hung up on the inquiry, you’re not going to be too surprised that inquiry.

The important thing is that the debate starts on the 19^th April, that people have to vote and decide and we either have a new tax system or we don’t, we go forward or we don’t, we deal with this issue and we take the country into the future or we don’t. And in my view the most powerful argument here is the decision of the Australian people.

And who do you think of those two Senators is the easiest to negotiate with?

Well Matt I’ll take everybody who’s going.

Okay Treasurer thanks for joining us.