Financial System Inquiry

This month’s Wealth Pipeline discusses the Financial System Inquiry which was headed by David Murray.  We also take this opportunity to wish you all a festive holiday season and happy New Year.   

Financial System Inquiry

The Financial System Inquiry (FSI) which is commonly referred to as the Murray Report was released by Joe Hockey on the 7^th of December.  It contained 44 recommendations for the Government to consider.  The Government will undertake a public consultation seeking stakeholder views in order to assist them in shaping their response.  The Government has stated that it expects to complete its review by March 2015.

The big proposed changes

The following lists some of the bigger ticket-item recommendations to come out of the Murray Report:

• The abolition of the use of direct leverage by superannuation funds, which obviously targets SMSFs employing limited recourse borrowing arrangements as an investment strategy;
• To reassess the concessional tax treatment of superannuation in light of the superannuation tax concessions currently benefitting higher income earners;
• Australian banks’ need to raise capital levels to better withstand financial shocks and protect taxpayers from costly financial sector bailouts; and
• The risk-weighting used by banks in calculating their capital ratios be adjusted to promote competitive neutrality between the large banks and their smaller competitors.

The report also included brief commentary on tax distortions caused by the favourable taxation effect of negative gearing, capital gains and dividend tax credits compared to other types of returns on savings (such as interest from bank deposits and fixed-income products).  The FSI has recommended that the upcoming Tax White Paper considers reforming the taxation of savings.

​Our Comments

Hopefully the Government will take the FSI’s recommendations seriously and not cherry pick from the list (as Labor did with the Henry Report).  Further comments:

• Smaller banks like BoQ and Suncorp are likely to benefit from the review. 
• There is likely to be a spike in SMSF direct borrowing in the New Year due to the threat of prohibition. 
• The review is unlikely to increase mortgage market competition.