Ore- inspiring move
ANDREW Forrest is giving $ 400 million to good and charitable causes. On the surface he could have got the taxpayer to stump up nearly $ 200 million of the money.
These donations are tax deductible and you’d think he’d be on the top tax rate ( somewhere between 47.5c and 49.5c depending on what happens in the Senate over the Budget moves).
But a spokesman for Forrest was quoted yesterday as stating that he would NOT claim a deduction. That’s also his – and everybody else’s – right: you make a donation to a charitable cause, you don’t have to claim it on your tax return.
So, let’s at least hope the iron ore price doesn’t collapse; in those circumstances, Forrest might find it hard to stick to his full generosity, for the money’s coming straight out of the Fortescue share price.
But I’m also guessing that Forrest’s tax affairs are “complicated’’. It’s entirely possible he simply doesn’t have the taxable normal income against which to make the deduction – even by spreading it over many years.
Almost all his $ 4 billion wealth would be in Fortescue shares; the great bulk of his normal taxable income would be in dividends on those shares. But they are fully franked – because, it’s worth noting, Fortescue is a big Australian taxpayer. Then there’s capital gains tax. If Forrest is donating by selling or gifting shares, if he sincerely wants to donate the full $ 400 million out of his own pocket, he can’t claim offsetting CGT relief.
Ah, the power and mysteries of tax deductibility.
THE Government appears to have either spectacularly overestimated the amount it will raise from the bank levy – or explicitly assumed the banks will pass the cost on to their customers.
Based on the $ 965 million that the Commonwealth Bank, Westpac, ANZ and National Australia Bank estimated it would cost them each year, at best the Government might raise about $ 1 billion a year instead of the $ 1.5 billion claimed in the Budget.
There is no way it could raise the extra $ 600 million or so from the last and smallest bank, Macquarie. It’s not only too small, it’s also “too smart”.
This suggests that the levy might raise more like $ 4 billion over the four years – at best – not the $ 6.2 billion claimed in the Budget.
That is, unless the banks moved to recoup the levy from their customers – either cutting deposit rates or lifting lending rates or doing both.
So do we have yet another Treasury budget estimate cock- up?
Or has Treasury implicitly assumed that the levy would fall on customers not shareholders?
For if the banks recouped it from customers, while the actual levy amount would stay the same, there’d be more company tax paid on the resultant “higher’’ bank profits.
Higher is in quotation marks because the banks would just be returning their profits to the pre- levy levels. If indeed they could: they would have to do it in the competitive market.
All this “calculating” is before assessing whether the banks might decide to take some – perfectly legitimate – action to reduce the levy, by for example increasing the amount they get from deposits which are not subject to the levy.
In short, I doubt that Treasury has the slightest clue of how much the levy will actually raise over the four years. The Government could well end up with the worst of all possible results. You get lower deposit rates and pay more on your loans; the Budget ends up with a relatively small inflow; but our banks will have been ( marginally) damaged in global markets. I equally doubt that the Treasurer has the slightest clue of quite what he might have unleashed
Although frankly, whether it raises the claimed $ 6.2 billion, or “only” $ 4 billion, or indeed something less, it’s pretty much a rounding issue in a Budget that is going to pluck a total of something north of $ 1920 billion from your pockets over those four years.
The four banks said the levy would raise a total of $ 1380 million from them. But it will be a tax deductible expense so it would cut their combined tax bill by $ 415 million, leaving the net raising at $ 965 million.
Some commentators seized on this as the explanation for the shortfall.
But that’s not correct; the Budget explicitly calculated the net levy amount after “interaction” ( deductibility) with company tax.
However, if you assume the four banks would move to recoup the $ 1380 million in their loan and liability pricing, that would flow straight back into profit and thereby also recoup ( for the Government) the $ 415 million via extra company tax.
So the net amount raised from the four would approach $ 1.4 billion a year. Add on Macquarie, and we’d get near $ 1.5 billion. But only because – if – the banks had passed it on, in full, to their customers.
And to repeat, that’s before making assumptions about how the banks adjust their balance sheets and behaviours to reduce the levy impact.
Or does it chase its fiscal tail? If six points of levy only gets it, say, $ 800 million a year, does it up the levy to 12 points? And when that fails to get the assumed doubled $ 1.6 billion but instead, say, $ 1.1 billion, does it up the levy again to 18 points?
I doubt that Treasury has the slightest clue of what the numbers might actually be in the real world.