Taxing Times Ahead For Credit Unions
Sydney Morning Herald
Tuesday October 26, 1993
FOR three million credit union customers, last week brought bad news. A desperate campaign by the credit unions to save their partial exemption from company tax failed.
As originally envisaged in the August Budget, the Federal Government will phase in the full corporate tax rate over the next few years - which is bound to mean cuts in the benefits credit unions supply.
The move comes at a time when the Government is looking for money and credit unions are looking particularly good. As the table below shows, profits are up substantially, membership is growing, reserves are healthy and the capital adequacy ratio stands at a solid 12.6 per cent - well above the 8 per cent of banks.
Credit unions are financial co-operatives formed by people who have a common bond.
All income, apart from expenses and money retained for reserves, is returned to members in the form of favourable deposit rates and low cost loans.
Over the past decade, the credit union movement has managed to consolidate its position into one of strength. Despite the recession, credit unions have achieved strong profitability and low bad debts - bad debts represent about 1.2 per cent of total income.
Much to the chagrin of building societies, they have rapidly been moving into housing loans.
Building societies, which pay the full corporate rate, have accused the Government of giving a "formidable financial competitor a free ride" and lobbied to have the tax exemption removed. Mr Jim Larkey, executive director of the Australian Association of Permanent Building Societies, says: "Credit unions are now competing fully for funds and lending across the entire spectrum of the retail market. They have a large operating margin and can no longer justify government subsidy".
But the Credit Union Services Corp (Australia) Ltd - known as CUSCAL and representing around 85 per cent of credit unions - has argued that credit unions are structurally different from building societies and should continue to be treated differently.
In its submission to the Senate Standing Committee on Finance and Public Administration, CUSCAL argued it was "nonsense" to call building societies mutuals since they were permitted to issue permanent share capital and allow individuals and corporations to acquire shareholdings for personal gain.
"Instead of issuing and servicing share capital, credit unions are capitalised entirely by retaining their surpluses in the form of statutory reserves. This means that the surpluses made by credit unions are used to satisfy prudential (capital) requirements and thereby remain the communal property of all members." CUSCAL unsuccessfully argued its exemption was now as valid as it had been when first granted in 1974.
Credit unions also argued that they were culturally different - they served only members and did not have to satisfy shareholders. They said they have more rural branches and agencies than most major banks.
But credit unions have lost their battle and it remains to be seen how their large membership will be affected in coming years as the tax is phased in.
But who uses credit unions and what do they use them for?
There are 329 credit unions and their $10 billion in assets represents a fraction - 1.2 per cent - of the total assets of the financial sector. Yet they are firmly entrenched in the Australian way of life. According to Reark Research, credit unions are:
* The largest providers of personal loans.
* Second largest providers of fixed term deposits.
* Fifth largest issuer of cheques.
* Sixth largest providers of investment passbook accounts.
* Seventh largest providers of pensioner deeming accounts.
* Ninth largest providers of home loans.
The typical credit union member is an Australian-born professional aged 30-55, married with children and paying off a mortgage. He is likely to be employed within the government sector and covered by an award. Compared with bank and building society customers, credit union members are more likely to be working full time - 60 per cent - versus 47 per cent for bank and building society customers.
Credit union members have a higher average educational level (26 per cent university educated) compared with bank customers (23 per cent) or building society customers (21 per cent).
Credit unions offer a wide product range which includes:
* Loans: personal, housing, home improvements, fixed interest, mortgage balance offset.
* Savings: on call, term deposits, Christmas accounts, payroll deduction, bill paying, budget account, direct deposits, money market, children's savings accounts, savings.
* Investments: managed investment funds, including superannuation, approved deposit funds and a portfolio administration service.
* Insurance: household building and contents, motor vehicle including third party, life insurance, boat and caravan insurance.
With a third of their income to be siphoned off, credit unions will have to embark on harsh belt-tightening. Mr Graham Loughlin, the general manager of CUSCAL, says the new tax will put at risk the social and economic benefits provided.
At present more than half members' deposits are held in accounts containing less than $300, rising to 90 per cent in some credit unions. Unlike other financial institutions, most credit unions do not charge account keeping fees on these low value accounts.
"It will reduce the extent to which credit unions can participate in providing financial services, financial assistance and counselling, volunteer involvement and community development," Mr Loughlin says. "It will lead to increased costs for all 3 million credit union members but especially the battlers."
HOW THE CREDIT UNIONS SHAPE UP
June '93 June '92 Change %
Members (000s) 3090 2808 10.04
Deposits ($m) 10,017 8783 14.05
Loans: Total ($m) 8572 7803 9.86
Housing 3557
Personal 4433
Total assets ($m) 11,291 9918 13.84
Reserves ($m) 941 790 19.11
Prime liquid
assets ratio(%) 13.34 14.20 -6.06
Capital
adequacy ratio (%) 12.53 8.87 41.26
Reserves
to assets (%) 8.33 7.96 4.65
Operating
profit ($m) 142 112 26.79
No of organisations 332 348 -4.60
© 1993 Sydney Morning Herald
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