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Chapter 23: Bringing all co-operatives into the new entity regime

A case for reform

Different arrangements currently apply to the taxation of various types of co-operatives. Some are taxed wholly like companies, others (‘tax co-operatives’) are taxed mainly like companies although with some differences. The alternative treatment has contributed complexity to the current system, as well as uncertainty, as co-operatives need to meet sometimes imprecise criteria to attract the alternative treatment.

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A strategy for reform

To tax all co-operatives like other companies under the redesigned imputation system, which would remove the problems associated with the current alternative tax rules and improve the consistency, simplicity and clarity of the tax system.

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Key policy issues How would dividends from tax co-operatives be affected? How would rebates and bonuses provided by tax co-operatives be affected? Should tax co-operatives be treated differently on the basis of the mutuality principle? How would the deduction to tax co-operatives for the repayment of government loans be affected?
The redesigned imputation system, with refundable imputation credits, would result in the same overall tax payable as now on distributions to taxable members. Treatment of the rebates or bonuses received would differ depending upon whether they are linked to commercial operations of each individual member undertaking business with the co-operative or whether provided in their capacity as a shareholder.

If received in a shareholder capacity, they would be either treated as a distribution or subject to FBT rules. Where received on a commercial basis, the general deductibility provisions would apply.

Although co-operatives are established according to broad principles of mutual involvement and participation, this does not mean that the tax principle of mutuality applies to them. Although the deduction appears to have limited applicability, it could be maintained if tax co-operatives are taxed like companies.