BANK TAXATION

Evening Post, Volume CXV, Issue 48, 27 February 1933, Page 8

BANK TAXATION

EFFECT ON INTEREST

WHY RATES NOT LOWER

STATE COMPETITION

Mr. J. T. Grose, chairman of- the Associated Banks, in a statement made for general information,' shows that the banks operating in New Zealand are willing to still further reduce the rate of interest on advances, but under certain conditions. The principal of these conditions are: (1) A change in the incidence of taxation of the banks; (2V reduction in the market rate for money offered by the Government itself; The chairman of the banks pointed out that already the banks' minimum overdraft rate has been, reduced from 7 per cent, to 6 per cent, in two steps of i per cent. These reductions, it hag been said, represent less than 20 per cent, reduction required in fixed mortgages. "But setting aside reasons whybank overdraft rates (which are charged only according to the day to day balance, and therefore are probably less costly to the borrower by $ per cent, than a fixed loan) should not equitably be subject to the same adjustments as interest rates on fixed mortgages," Mr. Grose observed, "it is most important to bear in mind that in addition to tho above official reductions', further reductions have been and are being made in very many cases to help and encourage worthy customers and to relieve cases of hardship. In many other cases of real need interest has been waived altogether to enable customers to carry on." J Mr. Grose stressed the fact that "in the aggregate, bank overdraft rates have been reduced at least 20 per cent, during the past eighteen, months, and the Government have been informed of this on several occasions." "It is not to be inferred that further all-round reductions in interest rates are considered undesirable; but it is important that cognisance should be taken of the fact that one formidable obstacle standing in the way of such further reductions as the banks not only deem desirable and salutary, but have actually suggested, lies in the arbitrary method by which the banks are assessed for income taxation." ARBITRARY TAXATION. Mr. Grose then explained how the banks were taxed for income. "It is assumed," he said, "that banks earn 30s per annum on every £100 of their average assets plus their average liabilities, and on the fictitious income arrived at by this inequitable and inelastic method banks are taxed at the maximum rate. However much their actual income may fall in adverse years, the tax is still levied on an income which, for taxation purposes, is assumed to be undiminished. "Even if a bank made a loss on its trading, it would still be required to pay the same income tax as if it had made a profit, and if In addition to trading loss it had to write off bad debts (which banks are not at present allowed to deduct from the arbitrary taxable income) it would still under the present system of taxation have to pay the same income tax on the full amount of the income which it is assumed to havo earned, but which it had not in fact earned. "It is well known that banks must depend, for a considerable portion of their profits, on the margin between the rate they pay on fixed deposits and the rate they receive on overdrafts. Even in normal times this margin is a narrow one, and yields a very small proportion of net profit after ovoTll.e3.cL expenses have been paid; this margin, owing to the depression, has well-nigh been pared away altogether. Banks, of course, pay every penny of the interest owed by them, but 'because of the misfortune of some of their debtors, and of tho banks' leniency to others in necessity, the banks receive by no means all the interest -which is owed to them. This absorbs a portion of the already attenuated margin. "A concrete example may be taken to illustrate the harsh incidence of bank taxation, and to show hqw the margin is further narrowed: "With a minimum overdraft* rate reduced to 5 per cent, a bank would earn on an overdraft of £100 interest &5 annually, less 8s 9d income tax; on £100 fixed deposit at 5 per cent, (and large sums continue at that rate until July 31, 1933, and at i\ per cent, until May 31, 1934) a bank would pay £,5 annually, plus 8s £>d income tax, so that on those two items there would be a loss of 17s 6d. There are other advances and deposits at other rates, but the above example illustrates ho^y the margin between rates (ja overdrafts and deposits is narrowed by the method of taxation, which, it "will, be seen, is a factor operating against lower overdraft rates. "It has been suggested, by some people that reductions in fixed deposit rates should apply to current as well as to subsequent deposits, but such a" course would be abhorrent to the banks, and. if adopted would lead to a flight of capital and do New Zealand incalculable- harm. It is noteworthy that in New South "Wales, where a permissive clause giving banks the option of doing this was included in the Interest Reduction Act, not one of the banks availed itself of it. FIVE PER CENT. ATTRACTION. • "It might be contended," Mr. Grose continued, "that the best overdraft rate could be reduced to, say, 5 per cent., and that the minimum margin which it: is imperative to preserve could be maintained by a suitable adjustment of fixed deposit rates. But here again there is a very real obstacle, It is patent that, in the interests of the banking organisation and of the whole country, the volume of the total deposits should be maintained at a level consistent with sound banking, and'that to do this would be completely impossible if competing financial concerns, including Government Departments, were to draw deposits to themselves from the banks by reason of higher rates offered. ' . "The banks recently reduced fixed deposit rates as a preliminary to a reduction in overdraft Tates, but to do the latter may be impracticable if competitive deposit rates are not properly adjusted, and if other conditions militating against lower overdraft rates are not remedied. "Nevertheless, the Government have in tho past increased their borrowing rate 3 despite, reasoned objections from the banks, and even today the Government over-the-counter rate is no less than 5 per cent. "To sum up, the banks, who today are finding the funds to enable tho community, and the Government, too, to a large extent, to carry on, and even facing loss in very many instances rather than see deserving clients fail, would be adopting a short-sighted and unsafe policy were . they further to reduce interest rates appreciably while still remaining under the obligation to pay income tax under an unfair system which assumes that bank profits remain undiminished, and which prohibits the deduction, from taxable bank incomes, of bad debts actually written off. "Were overdraft rates to be reduced without adequate adjustments being made in the method of taxing bank incomes, the inevitable and inescapable result would be to curtail-the banks' means and power of, , assisting their customers and the community in general. "The banks are willing to provide additional relief %o the p.resenj sjtua-