The Murray Inquiry’s interim report
Banking on Tax, Issue 13
The Murray Inquiry has reviewed the Wallis framework for the financial system and assessed how well it is suited to current economic conditions, taking into account the lessons from the global financial crisis.
The challenge for the Murray Inquiry is to develop a framework that has a 10 to 15 year vision for financial services, given trends in technology, globalisation and ageing.
The Murray Inquiry’s interim report is a wide ranging review covering a number of issues. Major takeaways are:
- Competition is the cornerstone (i.e. a level playing field)
- Disclosure is not sufficient (due to complexity, conflicted advice and consumer disengagement)
- Financial services are global (so shocks to the market can come from anywhere).
A number of matters have not been addressed, including:
- Future scenarios, such as:
- Changes in the boundaries of financial services
- New business models
- New entrants
- Advances in technology
- Wallis – what worked and what didn’t
- Global regulations.
The interim report presented 136 policy options and is unlikely to follow through on all of them.
The interim report did not make any recommendations for tax changes. However, it did make a series of observations on aspects of the current taxation system which could affect the efficient allocation of capital in the financial system.
The interim report flags the potential removal of interest withholding tax on all foreign funding of Australian banks. It is not as clear whether removing withholding tax from interest on debt funding provided by the foreign head office of Australian bank branches is supported.
The interim report suggests support for removing the current cap on tax deductions for interest on funding of local branches of foreign banks.
It also notes that the current application of withholding tax arising from clearing derivatives through a central clearing party is putting Australia at a competitive disadvantage.
There are no recommendations for change that address the distortive effects of GST not being levied on most financial services. Given recent political debate and lack of interest in any changes to the GST (most notably raising the GST rate), it is questionable whether this aspect of the interim report will progress.
The interim report suggests that the imputation system affects investment decisions between debt and equity capital in Australia. However, no recommendations are made for modifications to the imputation system to encourage offshore expansion by Australian companies, while still encouraging those companies to remain domiciled in Australia. The interim report did not discuss previous imputation reform suggestions such as allowing streaming of franked income to residents (only a partial solution), or allowing imputations credits for foreign tax paid. These matters should be addressed in the final report or, more likely, in the Taxation White Paper.
However, if it carries through on some of the policy options, there is potential for seismic shifts in Australia’s financial services landscape.