Given the political and public backlash against the banks, bankers are privately concerned it would be difficult to pass on the higher tax costs to customers.
The 10 per cent GST’s application to financial services is complex, leaving the existing rules open to interpretation and inconsistency in application.
Margin-based activities or any product charging an interest rate, such as credit cards and home loans, are generally not liable for GST and hence the banks cannot claim a credit.
However, fee-based charges are subject to GST and the banks are eligible for a tax credit.
The rules are even more murky because some credit provision business costs, such as for accessing the interchange system, marketing, anti-fraud, debt collection, credit checks and loyalty schemes, may fall within the GST system.
Hence, banks are allowed to claim a portion of these types of costs for providing consumers with credit cards, home loans and transaction accounts.
Banks receive a GST credit of about 50-60 per cent for these costs, but anATO draft proposalpublished in December would result in the portion of GST claimable falling to about 20 per cent, according to an industry estimate.
The ATO is concerned a lack of clarity on the apportionment rules has created uncertainty and caused some banks to be more aggressive than others in claiming GST credits.
Contacted for comment, ATO deputy commissioner for indirect tax Tim Dyce said the ATO had been examining the issues for several years and the public draft view published in late December provided the practical application of the law’s principles.
“It was important to be transparent with industry about that practical application,” he said in an interview.
“At the end of this process there will be greater certainty on the ATO view to help industry and greater consistency across credit card businesses.”
The proposal on credit cards is ultimately expected to be applied to other financial services products such as home loans and transaction accounts.
Tax advisers believe there is a strong difference of opinion between banks and the ATO over how the rules should operate and how much GST banks should be eligible to claim as a credit.
One source predicted it was likely to lead to a fight in court between some banks and the ATO.
The Australian Banking Association is helping co-ordinate negotiations with the ATO.
An ABA spokesman said it would respond to the ATO’s public draft guidance released in December once it had fully assessed the impacts.
“The industry notes that any changes resulting from the draft ATO guidance will apply prospectively and is likely to result in changes to previous practice,” the ABA said.
“Initial assessment indicates it would increase costs for those businesses offering credit card products.
“The industry has previously stated to the ATO that no further clarity is needed in regard to GST apportionment and considers the existing guidance well understood and long settled.”
A tax industry source said the rules probably required a bit of tightening, but the ATO had swung the pendulum too far in its crackdown.
The ATO is examining whether some of the GST costs claimed have a real and substantial connection to the credit card facility or merely have a lose connection.
More industry consultation is due in the coming months, before an expected final ATO determination later this year.