SYDNEY, Australia – Although he doesn't see what the big deal is about U.S. credit unions being taxed, Rob Nicholls CEO of Australian National Credit Union (ANCU), admits that if Australian credit unions had an exemption he would fight to keep it, as part of his responsibilities to his organization. Australian credit unions are taxed at 30% of their net profits and have been for the past ten years. ANCU is the second largest credit union in Australia with AUS$2 (US$1.5) billion in assets. It grew as the result of many mergers over a 50-year period. Nicholls sees no contradiction between the social goals of credit unions and the "social responsibility of paying taxes," all part of civic responsibility. Australian personal taxes rates are also high, he said. The 48% bracket kicks in at AUS$80,000 ($US61, 335). An estimated 50% of the Australian taxes go for health, education and welfare. Approximately 23,000 of his 200,000 members are pensioners and beneficiaries of the tax system, he said. "Tax avoidance shouldn't be an industry," he said. "Taxes pay for a system of good government." "American tax payers are subsidizing credit union members," Nicholls said. He is talking not about the underserved people, but the middle class credit unions. Taxed credit unions can still do the good work they are known for, he believes. ANCU's First Nations Credit Union works among the Aborigine community which has a high-poverty rate leaving many native people unbanked except for the credit union. When banks pulled out of isolated and less-profitable communities leaving people to travel up to six hours for basic banking services, Australian credit unions stepped in to set up alternatives. When taxes were first applied to credit unions 10 years ago, Nicholls said profits dropped for a short time. He said they drove some mergers although mergers had been going on before. Thirty years ago Australia had 777 credit unions. Today there are 163. "However I believe these mergers would have happened anyway. Competition, falling margins and inefficient credit unions and compliance burdens have all been major factors motivating mergers." Even though Australian credit unions can do business anywhere with anyone, they maintain the spirit of co-operation rather than competition, Nicholls believes. "Taxes are just another expense such as payroll." He pointed out that Australian building societies, which are co-operative societies similar to credit unions always paid tax in Australia and still served the interests of their members and the co-operative spirit. "You can be a credit union if you're taxed," he said. "Fees can still be competitive. Credit union account fees are still lower than banks or non existent." Australian credit unions constantly receive higher approval ratings than banks for customer service. "If we are a co-op with integrity and we're not paying tax as a corporation, we need to explain why," Nicholls said. He said that should be done without emotion. Nicholls said capital creation is not a problem with Australian credit unions who rely on retained profits. Nicholls admitted that where a credit union had weak profits then taxation did hurt. He explained, "Some Australian credit unions have raised tier-two capital called subordinated debt to supplement their capital but that can be expensive in terms of the interest rate." Nicholls added that the "income tax was not the cause of these credit unions raising this extra capital. It was rapid on balance sheet growth which required more capital to back the growth. So while Australian credit unions were tax exempt for many years up to 1995 the tax exemption was important to enable the movement to establish itself, but having to pay income tax at 30% has not changed the mutual structure or the effectiveness of our credit unions." CUNA's Bill Hampel when asked about Nicholl's point of view and how taxation might affect American credit unions said that U.S. credit unions can only raise capital by earnings retention, unlike U.S. banks. "They cannot issue stock or count subordinated debt toward statutory capital requirements. Taxing earnings would reduce capital, although they still would need to meet capital requirements." What Australian credit unions have won is "full powers like banks to do any banking business anywhere," Nicholls said. The regulator uses "the same risk based approach as they do for banks. All the inspectors do is ensure we have the management expertise, policies and processes to properly manage any increased business risk on the lending we do. Australian credit unions break down to approximately 70% home loans, 20% personal loans, 5% commercial loans and 5% other which includes a small amount of business lending, he said. According to Hampel, credit unions in the U.S. have substantial powers, and are evaluated on risk criteria, but their powers are not as extensive as those available to banks. Nevertheless, these powers have grown substantially through time, and CUNA is constantly working to increase credit union powers where appropriate. Hampel said he is unaware of any significant desire on the part of U.S. credit unions to trade their tax exemption for more powers. Hampel sees another danger in taxation that Australia has not experienced. "Loss of the tax exemption would remove a powerful incentive credit unions have to remain cooperatives. Members benefit hugely from the cooperative structure, but if credit unions were taxed there would be strong incentives for taxed credit unions to convert to bank charters, much as the mutual thrift industry in the U.S. has largely converted to stock form. If this were to happen, members would lose the benefit of the cooperative structure, which goes far beyond the tax exemption." Approximately two dozen credit unions in the U.S. have converted to bank charters, Hampel said. No one can predict with 100% accuracy exactly how U.S. credit unions would react to taxation, other than to say it would cause changes. However, in countries where they are taxed, credit unions are flourishing. Where Nicholls and Hampel agree, if you aren't taxed, you have to fight it for the good of your organization. [email protected]

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