New Zealand credit unions may soon follow their Australian counterparts and lose a century old tax exemption.
Commerce minister Paul Swain says the Government is currently trying to determine whether the income tax free status of credit unions gives them an unfair competitive advantage over other financial services institutions.
"Credit unions have been exempt from paying income tax since 1891. Nobody knows for sure why credit unions were granted that exemption," Swains says.
However, head of the New Zealand Association of Credit Unions, Doug McLaren, has reacted angrily to the suggestion, claiming the Inland Revenue Department (IRD) is driving the issue.
"We work daily with Commerce Department officials and they show an appreciation of the mutual philosophy of credit unions," McLaren says.
"But the money crunchers and theorists at the IRD seem to be confusing credit unions with corporations."
He says to compare credit unions with other commercial financial services companies is ludicrous as they operate in entirely different ways.
"In mutuals such as credit unions, all assets are owned by the members and can only deal with their own members," McLaren says.
While he disagrees with the IRD arguments, McLaren says that if the Government intends to revoke the credit unions' tax exemption, it will have to do the same to all mutual organisations such as clubs and friendly societies.
"Why are they just looking at us? I think the IRD has picked on credit unions as we're small and easier to nail on the head with a big hammer," McLaren says.
He says as most credit union members are on low incomes, any move to take away the tax exemption will "hurt those who can least afford it".
"Australia removed the tax exemption for credit unions five or six years ago and now they operate in the same market as banks," McLaren says.
"They had to say to all those low income people they'd helped over the years that 'it's tough, you're on your own now'.
"If we're forced to tax here we'll move upstream the same way. Who will pick up the social mess?"
He says credit unions are taxed in only four of the 80 countries where they operate with 100 million credit union members in the US alone enjoying the tax exemption.
New Zealand's 98 credit unions have a combined membership of close to 180,000 with more than $400 million in assets.
One of the reasons given by the Government for its review of the credit union tax situation is the recent decision to raise the deposit limit at credit unions from $40,000 to $250,000.
The finance minister, Michael Cullen, claims the lift in deposit limit will allow credit unions to increase market share.
However, McLaren says that while the change is welcome, its effect would be very limited.
"The IRD is saying that the lift in the deposit limit will lead to a huge surge in growth but there is still a restriction on growth in the credit union trust deeds," McLaren says.
He says the trust deeds only allow a credit union to accept deposits that are less than 10 per cent of its total assets.
"There are only two credit unions in New Zealand with more than $25 million in assets so only those two could accept the new maximum deposit of $250,000," McLaren says.
He says to be any threat at all to the major financial institutions, credit unions would have to increase "at least 100-fold".
The Government has called for submissions on the tax status of credit unions with a deadline set for early October this year.
Bridges acquisition a boon
As the tax-exemption debate rages in New Zealand, credit unions have just begun to roll out a new suite of financial products that may very well cut into the market of larger financial institutions.
Head of the New Zealand Association of Credit Unions, Doug McLaren, also hinted that the recent Tower purchase of financial planning group Bridges from the Credit Union Services Corporation Australia Ltd (CUSCAL) will have ramifications for New Zealand credit unions.
"We already have a very close arrangement with Tower in New Zealand and the Bridges acquisition will enhance our position. However, the details are commercially sensitive at this stage," McLaren says.
He says New Zealand credit unions use Tower as trustees and also offer some of its investment products.
However, the new product range is unrelated to the Bridges deal with the first offering, a loan protection insurance fully underwritten by the credit unions.
"It has received a brilliant response and we're writing much better business than we expected," McLaren says.
"We'll be expanding to a full range of insurance products, such as motor vehicle and household cover and we will be able to offer some unit trusts within the next 12 months."
He says people have been supportive of credit union products because the profits stay on-shore.
"Just look at the support that Jim Anderton [deputy Prime Minister] is getting for his Kiwi Bank idea," McLaren says.
Anderton has floated the idea of a low fee "people's bank" that has garnered a lot of interest over the past year.
Paradoxically, the "Kiwi Bank" would most likely compete for the same low income market as credit unions.
"If the Kiwi Bank happens it will impact on us but that's just healthy competition," McLaren says.