Explanatory Memorandum
(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)CHAPTER THREE Credit Unions
Summary of proposed amendments
3.1 Purpose of amendments: To phase out the current exemption from tax provided by section 23G of the Income Tax Assessment Act (the Principal Act) for income in the nature of interest paid to credit unions by their non-corporate members in respect of loans made to those members and to allow credit unions to be taxed as co-operatives.
3.2 Date of effect: The amendments will come into effect from the date upon which the Bill receives Royal Assent. They will remove the exemption for large credit unions (those with total gross assets in excess of $30 million as at 30 June 1993) and allow them to be taxed as co-operatives or companies, with effect from the 1994-95 year of income, subject to a concessional tax rate of 20% for the 1994-95, 1995-96 and 1996-97 years of income.
3.3 The amendments will remove the exemption for all other credit unions and allow them to be taxed as co-operatives or companies, with effect from the 1995-96 year of income, subject to a concessional tax rate of 20% for the 1995-96 and 1996-97 years of income.
3.4 Section 23G of the Principal Act currently provides that income in the nature of interest received by an approved credit union from its non-corporate members in respect of loans made to those members is exempt from income tax.
3.5 Section 23G was enacted to overcome the decision in Sydney Water Board Employees Credit Union Ltd v. FC of T 73 ATC 4129 where the High Court held that the principle of mutuality did not apply to interest paid to the credit union by its members in respect of loans made to them by the credit union, and that the interest was assessable income in the hands of the credit union.
3.6 This statutory exemption was justified on the basis that credit unions satisfied a social need for finance not provided at that time by other financial institutions. However, since financial deregulation, this justification is no longer valid. The range of personal financial services provided by credit unions is provided also by a wide range of other bodies which receive no tax concessions.
3.7 In order to ensure equity and consistency of tax treatment with other financial institutions, the law will be amended to remove the exemption. In addition, the law will be amended to allow credit unions to be taxed as co-operatives if they satisfy the requirements of section 117 of the Principal Act.
3.8 The proposed amendments initially will reduce the competitive advantage enjoyed by credit unions by taxing them as co-operatives or companies at a concessional rate of 20% until and including the 1996-97 year of income, after which they will be taxed at the full corporate rate.
3.9 Large credit unions (those with total gross assets greater than $30 million as at 30 June 1993) will be liable to pay tax at the concessional rate of 20% with effect from the 1994-95 year of income. All other credit unions will be liable to pay tax at the concessional rate of 20% with effect from the 1995-96 year of income. This will allow smaller credit unions an additional year to prepare for the introduction of taxation. All credit unions then will be liable for the full corporate tax rate for the 1997-98 year of income and all later years of income.
Explanation of proposed amendments
3.10 Division 7 of Part 3 the Bill will amend section 6 [Clause 39] , section 23G [Clause 41] , section 117 [Clause 42] and section 119 [Clause 43] of the Principal Act and will introduce new section 6H [Clause 40] into the Principal Act.
3.11 The object of the proposed amendments is to phase out the special tax treatment of credit unions. [Clause 38]
3.12 Subsection 6(1) of the Principal Act is amended by inserting a definition for 'transitional credit union' [Clause 39]. That term is defined as having the meaning given by new section 6H of the Principal Act, and it is used in amended sections 23G and 117 of the Principal Act and in amended section 23 of the Income Tax Rates Act 1986.
What is a 'transitional credit union'?
3.13 For the purposes of the Principal Act, a credit union is a transitional credit union in relation to a year of income if the year of income is the 1994-95 year of income, the 1995-96 year of income or the 1996-97 year of income and it is a designated large credit union. [New paragraph 6H(1)(a)] [Clause 40]
3.14 This means that credit unions with total gross balance sheet assets of more than $30 million as at 30 June 1993 will be liable to pay tax at the concessional tax rate of 20% for the 1994-95, 1995-96 and 1996-97 years of income and will be liable to pay the full corporate rate of tax for the 1997-98 year of income and all later years of income.
3.15 A credit union is also a transitional credit union in relation to a year of income if the year of income is the 1995-96 or the 1996-97 year of income and it is not a designated large credit union. [New paragraph 6H(1)(b)] [Clause 40]
3.16 This means that a credit union with total gross balance sheet assets of $30 million or less as at 30 June 1993, or a credit union that was not in existence as at 30 June 1993, will be liable to pay tax at the concessional rate of 20% for the 1995-96 and 1996-97 years of income, and will be liable to pay the full corporate rate of tax for the 1997-98 year of income and all later years of income.
What is a 'designated large credit union'?
3.17 A designated large credit union is a credit union with total gross balance sheet assets as at 30 June 1993 of more than $30 million. Total gross assets are to be determined on the basis of the amount of total gross assets that would have been disclosed in the audited balance sheet of a credit union for the last ordinary accounting period that ended before 1 July 1993 if its accounts had been prepared in accordance with generally accepted accounting principles. [New subsection 6H(2)] [Clause 40]
3.18 In other words, if the unaudited accounts of a credit union disclose total gross assets of $30 million or less and the audited accounts indicate that total gross assets actually exceed $30 million, the credit union will be a designated large credit union for the purposes of the Principal Act.
3.19 Proposed new section 6H uses the terms 'accounts', 'accounting period' and 'credit union'. A definition of each of these terms for the purposes of the new section is included in the proposed amendments [New subsection 6H(3)] [Clause 40].
3.20 The term 'accounts', in relation to a credit union referred to in new section 6H, is defined to mean accounts prepared by or on behalf of a credit union for the purpose of providing an annual report to the shareholders of the credit union.
3.21 The term 'accounting period', in relation to a credit union referred to in new section 6H, is defined to mean the end of its ordinary accounting period when the balance of its accounts is struck.
3.22 The term 'credit union' is defined to have the same meaning given to it in section 23G of the Principal Act.
Removal of exemption of interest received by credit unions
3.23 Section 23G of the Principal Act is amended to provide that subsection 23G(2) does not apply to a credit union in relation to a year of income if the credit union is a transitional credit union in relation to that year of income, or if the year of income is later than the 1996-97 year of income.
[New subsection 23G(2A)] [Clause 41]
3.24 This means that if a credit union is a transitional credit union in relation to a year of income, it will no longer be entitled to the exemption provided under section 23G of the Principal Act.
Credit unions to be allowed to be taxed as co-operatives or companies
3.25 Section 117 of the Principal Act is amended to provide that subsection 117(2) will not apply to a credit union in relation to a year of income if the company is a transitional credit union in relation to that year of income or if the year of income is later than the 1996-97 year of income. [New subsection 117(3)] [Clause 42]
3.26 Subsection 117(2) of the Principal Act currently provides that credit unions which enjoy the exemption provided for by section 23G of the Principal Act are not eligible to be taxed as co-operative companies. However, when the exemption no longer applies to a credit union, it will be allowed to be taxed as a co-operative if it satisfies the requirements specified in subsection 117(1).
Application of the mutuality principle to interest received by credit unions in respect of loans to members
3.27 Section 119 of the Principal Act will be amended to provide that if a credit union receives a payment of, or in the nature of interest, the payment is taken to be for the rendering of services [New subsection 119(2)] [Clause 43]. New subsection 119(2) is not intended to limit the generality of subsection 119(1). [New subsection 119(3)] [Clause 43]
3.28 It is clear from the High Court's decision in the Sydney Water Board Employees Credit Union case that interest received by a credit union from its members in respect of loans made to those members is not mutual income and is assessable income of the credit union. Nevertheless, the proposed amendment to section 119 of the Principal Act is intended to put beyond doubt that any payments of, or in the nature of interest, received by any credit union in respect of loans to its members is assessable income.
Application of the amendment to section 119
3.29 Proposed new subsection 119(2) is expressed to apply only to assessments in respect of the 1994-95 year of income and later years of income [Clause 44]. This is to ensure that the provision cannot be construed as having effect in relation to any year of income prior to the enactment of subsection 117(2).
Amendments to Income Tax Rates Act 1986
Summary of proposed amendments
3.30 Purpose of amendments: To provide a concessional tax rate of 20% for a credit union in the years of income in which it is a transitional credit union.
3.31 Date of effect: The amendments will come into effect from the date upon which the Bill receives Royal Assent and will apply to a credit union which is a transitional credit union in respect of the 1994-95, 1995-96 or 1996-97 years of income.
Explanation of proposed amendments
3.32 Division 2 of Part 4 of the Bill will amend section 23 of the Income Tax Rates Act 1986 (the Principal Act).
3.33 The object of this Division is to provide a concessional rate of tax for credit unions during the transitional period after which they become liable to pay tax at the full corporate rate. [Clause 46]
Rates of tax payable by companies
3.34 Section 23 of the Principal Act will be amended to include a reference to a 'transitional credit union'. [New paragraph 23(2)(e)] [Clause 47]
3.35 Section 23 of the Principal Act will be amended also to provide that the rate of tax payable by a company (other than a registered organization or a life assurance company) that is a transitional credit union in relation to the year of income is 20%. [New subsection 23(4E)][Clause 47]
3.36 This means that during the relevant transitional period, a credit union will be liable to tax at the concessional rate of 20%.