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Connexus : Issue 37
Work is progressing on policy options to unlock franking credits for shareholders of mutuals. Abacus has engaged tax experts to develop proposals to be put to the federal government, including the idea that a deposit product could be used to distribute franking credits. A mutual's shareholders are its customers, and the mutuality 'dividend' is delivered through product pricing and excellent service rather than as a cash payment tied to a share. However, mutuals pay company tax like other companies and therefore continue to build up franking credits for company tax paid. Companies that pay cash dividends can distribute franking credits as a benefit to their shareholders. But, for mutuals, franking credits are locked up. The mutual ADI sector has an estimated $1.5 billion in accumulated franking credits. In a welcome breakthrough in May, the majority report of the Senate Economics Committee's inquiry into competition in banking accepted the Abacus submission that the current arrangements for franking credit disadvantage mutual ADIs. The committee recommended that the government require Treasury to review the situation and report publicly on the advantages and disadvantages of various options. The committee quoted evidence from Heritage Building Society that the stockpile of unusable franking credits could make a mutual more vulnerable to a takeover. "These accumulated franking credits could be used against a mutual ADI in the event of a predatory takeover attempt by a listed entity," said Heritage. "Such a predator could offer to pay a dividend that incorporates Heritage's accumulated franking credits as an incentive to encourage members to accept their unsolicited offer of acquisition. In real terms, this enables a predator to use the funds of members to help finance an attempted takeover." In a sign of the complexities of this policy area, Labor senators commented in a minority report that the majority report recommendation doesn't account for the fact that a mutual has no shareholders receiving dividends, so there is no shareholder who needs to be protected from double taxation. In evidence to the inquiry, Treasury suggested that credit unions and building societies that are liable to pay company tax are taxed as 'cooperative companies'. It said income tax law was amended in 2003 to make it easier for cooperative companies that distribute profits to members to frank the distributions. "As a result of those amendments, cooperative companies can choose to frank distributions to members," said Treasury. "Alternatively, they can make unfranked distributions and obtain a deduction for amounts distributed to members. "The effect of these changes was to give cooperative companies that distribute profits to members the same access to franking credits as other companies [including banks], while maintaining the longstanding benefit of a deduction for unfranked dividends. "Where profits are not distributed to members due to legal, practical or other reasons, franking credits are retained in the cooperative. If these franking credits were to be distributed to members [in the absence of a dividend], cooperative companies would obtain an advantage over other companies." The majority report quoted the Abacus response to these claims: "All credit unions and building societies, except for a handful of very small credit unions, are liable to pay company tax, but Abacus is unaware of any credit unions or building societies that are taxed as cooperative companies. It is the case that credit unions and building societies may be able to elect, from year to year, to be taxed as cooperative companies, but to do so they would have to satisfy certain criteria. "The fact that most, if not all, credit unions and building societies do not elect to be taxed as cooperative companies indicates there are significant barriers to doing so. Despite paying company tax like our listed bank competitors, credit unions and building societies are unable to provide franked returns to their owners. "For example, should a mutual choose to pay a cash dividend, the level and type of dividend is tightly constrained by ASIC Regulatory Guide 147. The result is that credit unions and building societies continue to accumulate franking credits, but can't pass on the benefits." --Luke Lawler is a senior manager, policy & public affairs, Abacus Unlocking franking credits Senate committee calls on Treasury to find solutions to the $1.5 billion in franking credits locked up in mutuals' coffers. By Luke Lawler The mutual ADI sector has an estimated $1.5 billion in accumulated franking credits. www.abacus.org.au Connexus NEWS