Wednesday, 8 July 2015

Commonwealth attack on mutuality

Extract - analysis - Taxation White Paper

The White Paper is flawed, demonstrating the same systemic faults of previous Treasury initiated excursions into the area of financial reform. The paper simple ignores the principal issue at stake - the discontinuity between the taxing power and the responsibility for expenditure. Instead, the paper ranges over a number of ragtag issues that have been bouncing around Treasury for the past decade.

Does it matter?  Perhaps not. The Commonwealth has almost no real appetite for fundamental taxation reform. Outside a 2.5% increase to the GST, it is probable that only incremental changes are likely as a result of this exercise.

For many years, reform initiatives have been beggared by a single-minded obsession with promoting companies as the vehicle through which commerce should be pursued. The Commonwealth is wilfully blind to the fact that this reduction of business models restricts choice and the proven capacity of other models. It pursues this choice simply because the company model is the only business structure within the reach of the Commonwealth's present legislative power.

The Commonwealth has, for some time, taken active steps to reduce the possibility of cooperative organisations (which presently enjoy taxation advantages under the principle of mutuality) from re-emerging as a significant Australian market force (as they are in the economies of our trading partners). So it comes as no surprise that the White Paper again attacks the mutuality principle. The philosophical basis for this approach seems locked in a murky distaste for vehicles that do not produce tradeable investment products.

This approach is short sighted: cooperative business models are effective and viable business models that can generate, over time, significant commercial momentum, particularly in the provision of social benefits in the area of health and housing. In our trading partners they significantly out-perform private corporate models in a range of areas. While it might seem that there are significant taxation incentives in mutual schemes, most of these are aimed at legitimately preventing double taxation (a possibility the Commonwealth chooses to overlook).

In the same breath, the paper argues the opposite in relation to dividend imputation in relation to private companies, which particularly benefits Australian investors (and which scheme in this form is only found in other world economies like Mexico and New Zealand).

Mutuality can create problems - there are any number of cases where it has been misused to create private wealth through fraudulent practice or where it has unproductively locked away significant capital reserves. However, the reality is that getting rid of mutuality is a greater evil than keeping it. In particular, simply killing off cooperatives has led to the removal of active competition drivers and, in turn, led to a significant reduction in competition (eg, insurance market following the demutualisation of NRMA). The utilisation of mutuality is a valuable government tool in fostering greater competition. It is particularly valuable in startup situations where the community requires immediate social benefits (health/housing).

Mutuality is not well appreciated anymore in this country, although it is a valuable part of the business environment of most of our trading partners. The problem is not startup but shutting down unproductive instances. Of course, the paper does not canvass these issues, choosing a simplistic approach that has more to do with patch preservation than coherent policy development.

Peter Quinton
July 2015

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