The Rudd Government will provide an extra boost to banking competition by allowing non-major banks to access cheaper funding so they can offer cheaper loans to Australian households and businesses.
This significant reform will help support smaller lenders further in putting more competitive pressure on the big banks over time, particularly in the mortgage market.
The Government will phase down the Interest Withholding Tax (IWT) incurred by local subsidiaries and branches when they pay interest on borrowings from their overseas parents.
This reform also extends to Australian-owned financial institutions borrowing from related parties overseas, and any financial institution borrowing offshore retail deposits which they on-lend in Australia.
For local subsidiaries of overseas parents, the IWT rate will be reduced on such borrowings from 10 per cent to 7.5 per cent in 2013-14 and to 5 per cent in 2014-15. The Government is favourably disposed to reducing this rate to zero, subject to its medium-term fiscal objectives.
Additionally, the IWT rate applying to borrowings by any bank branch from its overseas head office will be reduced from 5 per cent to 2.5 percent in 2013-14 and to zero in 2014-15.
The Government expects this reform will allow such bank branches to continue their active lending to Australian businesses, including infrastructure investors, at even more competitive interest rates.
Today's announcement implements an important recommendation of the independent Australia's Future Tax System review.
It also responds to a key recommendation of the Australian Financial Centre Forum's report, Australia as a Financial Centre: Building on our Strengths, and furthers the Government's objective of developing Australia as a leading regional financial centre.
This measure will remove existing distortions to how financial institutions borrow from overseas – so that funding choices are based on commercial considerations rather than taxation.
As an integrity measure, the IWT phase-down will not apply to interest paid on non‑resident retail deposits held in Australia. It will also not apply to offshore borrowings by entities that are not financial institutions.
The Government is determined to make the banking system work for families and businesses, not against them, and this announcement is another key step towards that goal.
It comes on top of the Government's $16 billion investment in residential mortgage-backed securities (RMBS) to further boost competition in the mortgage market and put competitive pressure on the major banks.
Interest withholding tax rates and exemptions for financial institutions
| Type of borrowing | Current IWT | Future IWT | |
|---|---|---|---|
| From 2013-14 | From 2014-15 | ||
| Financial institution borrows from a foreign financial institution (where not exempt under a tax treaty) | 10% | 7.5% | 5% Aspirational target of zero |
|
Foreign bank branch borrows from overseas head office |
5% | 2.5% | Exempt |
|
Financial institution borrows from offshore retail deposits (proceeds used and traced to Australian operations) |
10% | 7.5% | 5% Aspirational target of zero |
|
Financial institution borrows through a publicly offered debenture issue, non‑equity share or syndicated loan |
Exempt | Exempt | Exempt |
|
Offshore banking unit (borrows and on-lends offshore) |
Exempt | Exempt | Exempt |
|
Financial institution borrows from non-resident retail deposits held in Australia |
10% | 10% | 10% |