An Up-Close Look At Effect Of Lost Tax Exemption

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The effects of losing the credit union tax exemption would be felt in far more places than the balance sheet, according to one person who's been through the process.

Australian Mark Lynch said there is much Americans can learn from the experience Down Under, where credit unions lost their tax exemption in the 1990s. The result has been a decline in growth, the erosion of support for the credit union mission, and, ironically, at least one bank stepping in to the vacuum created by the country's evolving CUs.

Lynch, who was formerly deputy chairman of Australian National Credit Union, the country's largest, and a volunteer with the Australian CU Foundation, is currently a trainer on a variety of disciplines, primarily board governance, and is based in Sault Ste. Marie, Mich. He shared his insights on what the loss of the tax exemption in Australia has meant to that country's credit unions during NASCUS' annual meeting.

To understand how the credit union landscape Down Under has changed, Lynch said it is important to understand where the country stood in the early 1990s. At that time it would have looked familiar to many Americans, with a national trade association, state leagues, chapters and credit unions' high level of involvement in communities at all levels, especially by volunteers. Many of the founders of Australia's credit unions and the movement were still involved in the late 1980s, most were close to members, even though they had limited product offerings. Nearly every Aussie CU was profitable, he said, with a high level of socially responsible activities.

But at the same time the argument was being made the Australian CU movement was similar in size and scope to a single state in the U.S., and it ought to become more efficient. The trade group, CUSCAL, became an industry association and service company. "Imagine in this country that CUNA and the corporates and the CUSOs all became one organization," said Lynch, noting that all the state leagues rolled up their operations simultaneously. One result has been that all but three credit union chapters disappeared along with the league support.

In the 1990s, larger credit unions also abandoned their limited FOM. Queensland Teachers CU, for instance, went from a teachers FOM to "anyone with an interest in education."

"There was also an attitude that we need to be more professional, and volunteers aren't professional, and many credit unions discouraged volunteers playing any role other than board members," noted Lynch. At the same time, the "keepers of the values," the founders of Australia's CUs, began to disappear. One reason: a bylaw said that at age 72 you could no longer serve as a volunteer.

Another change: directors of large credit unions began to be paid. Lynch noted that the amounts are large; in his case, he was being paid $45,000 annually as a board member.

Australia's credit unions in the 1990s moved from savings and loans to full service, while simultaneously reducing levels of socially responsible activities, Lynch reported. Many CUs also adopted very poor board governance standards, with some CUs failing.

How did all of that lead to loss of the tax exemption? It only played one part, according to Lynch. At the same time the Australian government was seeking more ways to increase revenue, arguing that credit unions were behaving more like banks and pointing to a breakdown in FOM and the inefficiencies of credit unions. "They said credit unions would be forced to become more efficient if they paid tax," said Lynch. He noted the country's credit unions should have responded that their efficiency ratios were lower because of all the extras credit unions provided to members, but they didn't do so. Interestingly, noted Lynch after his remarks, the country's banking industry was not a driver behind the loss of the credit union tax exemption.

Australia's credit unions responded to the government plan, but only in a limited way. "The reason the fight was lost was that the movement was totally unprepared," said Lynch. "They thought a Labor government sympathetic to credit unions would keep them protected. But there was a change in government. And some credit union leaders supported the tax. With no state leagues or chapters, there was no way to raise the issue on the local level. We were unable to articulate the credit union difference."

What has been the effect of losing the tax exemption? According to Lynch, the number of CUs has been halved, there is a high proportion of credit unions suffering losses, market share has declined, share of total assets is down, and $38 million less is being spent annually on members and the community every year. Moreover, there has been a dramatic increase in fees and charges, he said.

"The culture of the credit union movement in Australia has changed," said Lynch. "Credit unions now see themselves as small banks. The field of membership is disappearing."

Lynch noted that many Aussie CUs use the word "bank" in their slogans. The Australian movement's positioning statement is "Credit Unions: A Different Kind of Banking."

Lynch said the Australian CU movement has become highly centralized, socially responsible activities have decreased, and educating members about cooperative ownership is seen by many as irrelevant.

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