Further hurdle for savings

The government’s proposal to put GST on financial services is likely to further hinder savings, according to the Investment savings and Insurance Association.

"This move is fundamentally wrong," says ISI chief executive Vance Arkinstall.

However that position runs counter to advice from officials to Minister of Finance Michael Cullen.

According to a paper that went to the minister in March, allowing banks and financial institutions to recover GST would remove an anomaly that means the industry is in effect currently overtaxed.

According to this view, because the industry cannot currently recover GST for financial services, this cost forms part of the financial service – and is passed on to customers through higher prices.

"The theoretical argument against the inclusion of financial services is that, in the case of savings, financial intermediation merely defers consumption and, accordingly, should be outside the scope of the tax," the paper says.

"The alternative argument is that financial intermediation is a valuable service purchased by consumers and should be within the scope of the GST base."

Officials pointed out to the minister that these arguments "are unlikely to ever be resolved" but also that successive governments have assumed that, eventually, financial services would be included in the GST base as soon is a way was worked out of doing so.

The papers advising the minister – obtained earlier this year – focus mostly on the impact on the banking industry. They have less to say about the effect on the wider financial services industry.

The changes proposed will save the banks about $20 million, according to one estimate, but they will add to the management fees on unit trusts and other managed investments.