Reserve Bank clips Aussie banks for 'tax haircut'

The Reserve Bank has rejected submissions by Australian-owned banks operating in New Zealand for relief from new rules to guard against bank failures which will see them pay around $25 million in extra tax annually here.

Their concerns are reported in the RBNZ's response to submissions on the impact of new capital adequacy rules, known as Basel 3, which banks worldwide are being obliged to put in place as a buffer against future financial crises.

At stake is the treatment of financial instruments under the new regulations, requiring the nominal value of the instrument to be reduced by the potential tax and other offsets that occur at the time of conversion or write off in a bank rescue.

This so-called "tax haircut" could be worth around $25 million to New Zealand's Inland Revenue Department, the RBNZ notes in its regulatory impact statement on the effects of the Basel 3 changes, earlier this year.

"It is assumed that higher capital will shift income from a foreign tax jurisdiction (in practice Australia) to the New Zealand tax base generating a net benefit of about $25 million a year."

That is relatively small beer for the Aussie banks and represents a shift from Australia to New Zealand of taxable income.

All four of the major Australian-owned banks operating in New Zealand – Westpac, ANZ, BNZ and ASB – were hit with a collective $2.3 billion tax avoidance bill spanning several years in the late 1990s and early 2000s, in a landmark win for the IRD in December 2009.

However, banks had submitted to the RBNZ that "it would be difficult for banks to avoid the tax haircut and for the Australian-owned banks this could mean the parent bank would itself raise regulatory capital and inject capital into the New Zealand subsidiary rather than the New Zealand subsidiary raising capital through the New Zealand capital markets".

"This in turn could result in a parent bank running up against Australian Prudential Regulation Authority", which enforces capital adequacy ratios across the Tasman.

The banks also submitted they would be "highly likely" to have tax losses available "sufficient to offset any debt forgiveness income that would arise from a write-off".

The RBNZ, which was accused last week of having a bias in favour of the Australian-owned banks by Green Party leader Russel Norman, rejected those pleas.

"The Reserve Bank ... wishes to remove any risks to the generation of this capital at the time of conversion or write-off," it says in its response to the banks' submissions.

"The Reserve Bank accepts that if a bank had tax losses at the time of the non-viability event, then these losses could be offset against the income generated from the write-off.

"However, the Reserve Bank considers it is not possible to forecast the size of such losses in advance."

If a distressed bank were sold as part of a rescue, it would lose access to any tax losses, which cannot be transferred to new owners.

"The Reserve Bank has therefore not changed its tax haircut requirement."

(BusinessDesk)