GST law change ends overtaxing of banks

By IRENE CHAPPLE

Changes to GST law could produce a windfall for banks and the benefits may be passed onto customers.

Banks and other financial institutions used to be exempt from GST, but under new law will be zero-rated for the purposes of supplying finance to business operators.

Under the old regime, GST was not charged on the supply of finance because it was too hard to calculate the transaction cost.

Because they were exempt, banks were unable to claim tax credits, resulting in over-taxation on the supply of some services.

The costs are up to 3 per cent of the expenses budget, according to GST consultant Alastair McKenzie.

He believes that cost has previously been passed on to the customer.

Under GST legislation passed last month, banks' financial services will be zero-rated, ending the over-taxation previously suffered by the banks.

The question now is whether banks will pass those savings to customers.

McKenzie said the savings could easily be tens of millions of dollars.

He said the market would drive any change in how the banks responded to the savings, but there might be a decrease in costs swallowed by customers.

Eugen Trombitas, tax partner at Buddle Findlay, said the new GST rules were a positive development for the finance industry.

He said the ability to recover GST on business expenses would be an added incentive for financial institutions such as life insurers and superannuation funds to target business customers.

Trombitas agreed that market factors would determine whether the savings were passed on.

A spokesman for the Bankers Association, Errol Lizamore, said he would not comment on the changes until he had discussed it with member banks.

The amendments to the Goods and Services Tax Act will come into force in the first quarter of 2005.