The-then Coalition opposition originally criticised the idea, but then adopted it as an election promise, citing the "budget emergency". Upon winning government, the Coalition referred the proposal to David Murray's Financial System Inquiry, which recommended against the idea and suggested a different model.

As revealed by The Australian Financial Review on Friday, the banks are gearing up to fight the move.

ANZ chief executive Mike Smith told AFR Weekend that "with deposit rates where they are at the moment, why do you want to hit depositors again?"

"Why impose another tax on the savings of the elderly and retired? I don't understand this. It's not well thought-out."

The federal government is planning a tax on bank deposits at the May budget in a move that will raise about $500 million a year. James Davies

Asked about whether this would drive savers into riskier assets, Mr Smith said: "I think it will further encourage inappropriate behaviour."

In tactics similar to those used by the Minerals Council of Australia when it fought the mining tax, the Australian Bankers' Association released a report on Friday claiming the sector was already heavily taxed.

It said that for reporting year 2014, taxes paid to all tiers of government by banks totalled $13.7 billion, up from $11.9 billion the year before. Taxes included corporate tax, new unrecoverable GST, payroll tax, policyholder tax, fringe benefits tax, land taxes and council rates and stamp duties.


It claimed Australian banks already paid a higher effective tax rate than many of their OECD counterparts, and paid more tax in Australia out of the top-25 ASX200 industries.

Shadow treasurer Chris Bowen, who announced the proposal when he was treasurer, said the government had been hypocritical.

"They attacked this Labor measure, which was recommended by the Council of Financial Regulators, as a tax grab on individual bank accounts," he said.

"They then took it as policy, but then in government couldn't make a decision on it, referred it to Murray, who recommended against it, but have now decided to keep it.

"This botched process to get back to where Labor was in August 2013 just shows how Treasurer Hockey has no idea when it comes to the economy and business certainty or leadership."

With the government having to go softly in the budget for political reasons and with revues falling again because of decreasing iron ore prices, a Coalition source said the government could ill afford to forego the revenue from the levy.

In addition, some protection for depositors was needed given the uncertainty over proposals to force banks to increase their capital.

In the current political climate, in which voters have deserted the government over a budget perceived to be unfair, the source said the government was unfazed about angering the banks.


Australian Bankers' Association chief Steven Munchenberg said on Thursday the bank bail-out tax "is likely to be passed through substantially or fully to depositors".

But a senior banking source told AFR Weekend the decision on whether or not to pass the levy on to depositors would depend on prevailing competitive conditions in the deposit market and would ultimately be a matter for individual institutions.

"Each bank will make its own decision on how much of the cost of the levy is passed through to depositors in the form of lower returns," the banker said.

When the Financial System Inquiry was released on December 7, Treasurer Joe Hockey said the key recommendation to increase bank capital was a matter for the Australian Prudential Regulation Authority. APRA closely supervises Australia's financial institutions to ensure that their levels of equity are sufficient to safeguard the system in a time of crisis.

Yet despite most banking analysts suggesting that the banks will ultimately be forced to raise equity to meet higher capital requirements in the wake of Mr Murray's report, APRA has been vague about the timetable for introducing a stricter regime.