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Economics References Committee
29/10/2015
Cooperative, mutual and member owned firms

DONNELLY, Ms Robyn Anne, Private capacity

FISHER, Mr Jeremy Lawrence, Private capacity

LANE, Mr Simon Thomas, Chairman, Almondco Australia Pty Ltd

[09:28]

ACTING CHAIR: Welcome. Do any you have an opening statement?

Ms Donnelly : I do. My submission is made in my private capacity. I need to tell you something about my background, however. I spent approximately 10 years in the Registry of Cooperatives in New South Wales, and part of that time was on the intergovernmental committee to develop the cooperatives' national law. I am happy to answer any questions that the senators have in relation to the legislative or regulatory environment for cooperatives in New South Wales and, to a lesser degree, in other states. I am also the secretary of the Bathurst Whole Food Cooperative in Bathurst.

Most of the submissions encapsulate the barriers for cooperatives. I do not have anything in particular to say about the general mutual sector and am confining my comments to the cooperatives. They encapsulate the barriers for cooperatives as being based on the lack of recognition of the cooperative model, lack of education and the regulatory system. I also need to tell you that I spent some time as an academic teaching commercial law at Charles Sturt University, so I can inform the committee about the nature of the education at the bachelor of business level as well.

If the Senate committee accepts that the cooperative and mutual entities are significant contributors to the economic wellbeing of the Australian nature then it is my submission that as a matter of policy these entity types should not face greater administrative or legislative barriers than other corporate enterprises unless that regulatory differentiation is necessary to preserve the character of the entity type. Cooperatives are subject to what we call the international cooperative principles, and to a degree the formation process of a cooperative does have to include adherence to those cooperative principles in their governance documents. That is one factor which will always make them slightly different from a company in their formation process.

The current regulation for cooperatives derives from state law, with some overlap from federal law. It is primarily a matter of state regulatory power, with the division of legislative power arising from the corporations agreement settled between states and the Commonwealth in the year 2000. Under that system the federal parliament regulates the companies and the financial system whereas states regulate all other incorporated bodies, which are cooperatives, incorporated associations and the like.

The cooperatives national law scheme of legislation was an exercise amongst the states in developing uniformity of regulation and administration across all states and territories. Its purpose under its regulatory impact statement was to improve competitiveness with companies and to facilitate national operation of cooperatives. A state registered cooperative was unable, until the cooperatives national law, to carry on business in another jurisdiction without seeking registration in those other jurisdictions as foreign cooperatives. They had a dual regulatory system.

Despite those negotiations beginning in about 2005 under the auspices of COAG, the scheme has only partially been implemented. In that sense the scheme has failed. First, it has not commenced in all jurisdictions. There is no uniform administrative policy across those jurisdictions that have commenced the law. There has been no progress in removing dual regulatory requirements for cooperatives that are imposed as a result of the operation of the Corporations Act on interstate transactions by cooperatives. Those are in the areas of issuing securities across state and territory borders and also the requirement for registration under part 5B.2 of the Corporations Act. I can explain that in more detail, but I have put it in my written submission, so I hope it is relatively clear. I am happy to answer any further questions on that.

ACTING CHAIR: Thanks. Mr Fisher or Mr Lane, do you have opening statements?

Mr Lane : I have a couple of very brief things to add. I am here in my capacity as Chairman of Almondco Australia, which is an almond-processing company in the Riverland and South Australia but which has growers throughout South Australia, Victoria and New South Wales. As I have in my paper, I want to put forward a couple of constructive suggestions as to how the situation could be improved and add a couple of additional ones that I have thought of in preparing for this hearing this morning. I also want to give you a brief, stark example of what can happen in the rural communities if cooperatives disappear.

In South Australia, as Senator Xenophon would know, the South Australian bulk handling cooperative was set up in the fifties and looked after the interests of farmers for years and years. Farmers were very happy with the way it worked. It was taken over by Viterra 10 years or so ago. Many of the promises that were made by that incoming company have not been honoured. Farmers have become utterly disillusioned. Now Viterra has been taken over by Glencore, the multinational Swiss based mining company which has been in the press recently with billions of dollars of debt problems. I cannot imagine the farmers of South Australia are going to be high on their list of concerns when dealing with debt problems. So I am told there is a high level of disillusionment amongst South Australian farmers as a consequence of that transition from where they were to where they are now.

In due course I want to develop two additional suggestions but I do not want to do that now as part of my opening statement.

ACTING CHAIR: Thank you. Mr Fisher.

Mr Fisher : Thank you very much for the invitation. I am very pleased to be here to help wherever I can. I too hail from South Australia originally. I grew up in rural areas. I am a legal practitioner with a small practice which has national clients. I specialise in water, irrigation and cooperatives. To echo my colleagues, my thesis is simple: the company form of business structure has become fetishised in Australian business discourse and in able, if not treated carefully, to cause a great deal of harm to our regional community development interests. Skills in cooperatives and mutuals are hard to find. It is, as my colleagues just said and other witnesses no doubt say, difficult to find an education and training in these areas. Accountancy lacks skills here. Lawyers certainly are not familiar; it is not taught in law school. But it is there and it is ingrained in the Australian landscape. It is a big part of the Australian economy.

In addressing your terms of reference, our submission took a rather wide, helicopter view of things—

Senator XENOPHON: We used helicopters to get here!

CHAIR: No I didn't!

Mr Fisher : In the submission I have said the Australian economy and society are undergoing or facing quite a tremendous transitional period and, if we simply move from a world of extractive industries that are now in decline and assume that corporate forms and business processes that are appropriate to that side of the economy—which has served pretty well in the past—are simply transplantable across to a new world in which we produce more food and fibre, we have to look to a shift in our exports. We have to look to the succour and sustenance of our regional areas and communities. If we simply assume that those company forms, which, as I mentioned, are slightly overfetishised, apply in those new contexts, we could fall into error and cause a great deal of harm.

I am saying in response to your terms of reference that I think there is a great role for cooperatives and mutuals in the development of this nation going forward. That is the big picture and the big thesis, aircraft notwithstanding!

I have an additional thing to do with capital raising and how that works that I would like to draw to your attention, but it is not in the submission. I think that, logically, some other submissions and what I have said to you so far head in that direction.

ACTING CHAIR: Thank you. Senator Xenophon.

Senator XENOPHON: Mr Fisher, I will start with you first. In terms of capital raising, the purpose of this inquiry is to make what we hope will be practical suggestions that will have some real chance of being adopted by government. I think we are in furious agreement there in respect of that. I can put this to the whole panel, but I wanted to ask you specifically about capital raising and what you think ought to be done. There is the issue with cooperatives and their level of constraint at the moment. We had been given a note here about the board effects of sections 117 to 120 of the Income Tax Assessment Act. That is yours?

Mr Lane : Yes.

Senator XENOPHON: We might get you to address that. We have the CNL scheme; has that worked? Do we abandon that and just have a uniform federal approach in respect to this, because there is the issue of dual registration and the like. There are some broad questions—one has been directed to you, Mr Fisher, and another to you, Mr Lane. Ms Donnelly you actually made reference—

ACTING CHAIR: You have to register as foreign cooperatives in other jurisdictions.

Senator XENOPHON: That is right, so that is one issue. And Queensland is out of this.

Mr Lane : Can I make this comment: I do not pretend to have expertise in the area but I know one of your speakers this morning, Dr Gary Lewis—Australia's pre-eminent historian in this area—has strong views on this whole issue of the CNL. He was giving evidence earlier, so I would not presume to be able to give a better understanding to this committee than he can give. I have other perspectives where I hope I can help.

Senator XENOPHON: Those are some broad issues to deal with. You could just address those. I am focused on: how do we end up with a set of proposals that will have a fighting chance of getting through the parliament that will improve a lot of co-ops and allow them to flourish and reach their full potential? Who wants to go first?

Mr Lane : I am happy to deal with that.

ACTING CHAIR: You have cast a wide net, senator.

Mr Lane : I prepared that short document headed 'Broad effect of the relevant sections of the Income Tax Assessment Act' and I have also attached the actual sections. It is a very broad brush attempt at summarising complex legislation. Those sections of the Income Tax Assessment Act—and I think from private discussions with Senator Xenophon, even he was not perhaps as aware as he would have wished earlier—are complicated sections, but they do need to be understood as a basis for the submission that I want to make as to how they can be constructively finetuned to enhance the long-term viability of co-ops. I do not know if the committee has had an opportunity to skim read what I have written there—

Senator XENOPHON: Just walk through it. Us reading it is not going to be reflected well on Hansard, so if you just want to walk through it.

Mr Lane : Certainly. Section 117 of the act defines what a co-op is for the purpose of the tax act, and there are a whole range of criterion. I have plucked out what I think are the two key ones, which are: firstly, a co-op has to have a limit on the number of shares that can be held by any individual and, secondly, they are not allowed to trade their shares on a stock exchange. There are some others but they are relatively minor. That is the first to get through the door.

As the law stands at the moment and as it has stood for a long time—and it has been absolutely crucial in the success of cooperatives and their capacity to raise capital and to invest in infrastructure—it broadly provides that co-ops need to satisfy two tests at the end of each financial year. One is known as the ownership test and one is known as the business test. In terms of any loans that they obtain from government, be it a state or Commonwealth, they are able to obtain as tax deductions repayment of not only interest—which is the traditional method—but also principal. It is profoundly important for the survival of co-ops that that continue. What I am suggesting is that it can be slightly enhanced at no loss of revenue to the Commonwealth, but with a significant easing of anxiety within co-ops.

Firstly, to satisfy the ownership test more than 90 per cent of your shareholders have to be supplying—I use the word 'growers' because I am representing an almond growing company. Secondly, the business test precludes a co-op, for tax act purposes, from obtaining more than 10 per cent of its annual input from other than its growers. The reality is that many, if not most—and obviously I have not done this analysis—co-ops, in terms of satisfying that requirement that there be a limit on their shareholding for an individual shareholder, put that limit at 20 per cent. What I am suggesting to this committee is that logic dictates that if, because of that, you have companies that have people holding up to 20 per cent—

ACTING CHAIR: That noise means there is a division in the chamber. Please continue.

Mr Lane : The committee will understand that in a practical day-to-day sense—let's say a company has a couple of people on its register with a 15 or 19 per cent shareholding. If that person dies—or if their orchard gets destroyed or whatever—overnight the capacity to continue to comply with the ownership test and/or the business test can be destroyed.

Senator XENOPHON: You are calling for some flexibility in respect of that?

Mr Lane : I am suggesting two things. First of all, I am suggesting that the current limitation of 10 per cent be extended out to 20 per cent so that it sits logically and comfortably with the practical limitation of 20 per cent that exists on individual shareholding. The second point is that, at the moment, the legislation operates as a guillotine. It is an assessment that is done every financial year. Let's say someone dies—or ceases to produce—on 1 June. As the legislation stands at the moment, unless the co-op has got its affairs organised by 30 June the tax deductibility that it had been banking on for that financial year just disappears; the company may well have budgeted on the basis of what it was expecting in terms of revenue and expenditure but the game changes overnight. So the second thing I am suggesting—I have not put this in my written submission but I urge it upon the committee—is that there be some form of moratorium introduced. Whether that is for a year or for two years is a matter of judgement. It would not operate as a guillotine but it would give co-ops time to find another buyer for their shares, for example—

ACTING CHAIR: If you are selling property.

Mr Lane : exactly—or the opportunity to buy more than 10 per cent. For example, in the case of Almondco, if it has got contractual commitments to sell a lot of almonds to X and it is relying on one of its growers and that grower dies, it may well need to buy more than 10 per cent of its total intake of almonds from someone outside its grower base. At the moment, if it did that it would immediately lose its tax-exempt status.

Senator XENOPHON: I understand what you are saying. I guess the argument from—who has been giving advice on this? Treasury—because there are tax implications—or the bureaucracy?

Mr Lane : I am not actually sure that there are any revenue implications in either of these recommendations—and that, I think, is the key.

Senator XENOPHON: If it goes from 10 to 20 per cent and, in the case of death, a year or two is allowed to dispose of assets and the like, will some say it is the thin end of the wedge? I cannot quite see that, but what do you think would be the arguments against that?

Mr Lane : Twenty per cent is what many cooperatives impose as their limit on an individual shareholding. What I am suggesting is that there just be parity between the business and ownership test in the Tax Act at 20 per cent to match the practical reality of what happens within co-ops.

Senator XENOPHON: Is 20 per cent a hard and fast rule?

Mr Lane : No. I say in my written submission that 20 per cent would be ideal. The committee might even consider some compromise between 10 and 20 per cent, but I can assure the committee that 10 per cent is tight. We have within Almondco what are known as dry shareholders—people who are shareholders but are not producing—and as that number creeps up closer to 10 per cent I can tell you that I get anxious.

ACTING CHAIR: You can look at what Murray-Goulburn has just done, too.

Senator XENOPHON: In terms of the CNL, what is the view of this panel? Do you think we should just scrap it and start with a federal approach? Or do we try and build on it?

Mr Lane : As you know, I have had experience in the transition from state based company administration to national.

Senator XENOPHON: Yes, you were Commissioner for Corporate Affairs in South Australia.

Mr Lane : Exactly. I think the inevitable reality with co-ops, as was the case with companies, is that we need one law at the federal level.

Senator XENOPHON: Do the other witnesses agree? What do we do with the CNL? Do we scrap it and go with a federal approach, or not?

Ms Donnelly : I would like to see us build on the CNL but as a federal law. The CNL is a law that in many respects is imperfect but it does actually evince the personality of a cooperative more so than starting afresh, particularly in a space where our federal regulators are used to regulating companies that are quite different. It is my view that there should be a single national regulator of a CNL type law that needs improvement—if that makes sense.

Mr Fisher : I would echo that. I do not think the CNL is broken; I think it is a good thing. It is in a little bit of a strange place—everybody follows New South Wales if they are going to implement it—so making it a proper federal law would probably be an inevitable and sensible step. But the content of the law is not necessarily broken, so do not throw out—

Senator XENOPHON: It is the implementation that is a problem?

Mr Fisher : Yes.

Mr Lane : Consistent with that, there is probably a lot to be said for having compatibility between the definition of a co-op in the Tax Act and the definition of a co-op in whatever legislation you have. That is sensible.

ACTING CHAIR: You would think that would be a given—but unfortunately it is not.

Mr Lane : It is all part of the previous speaker's proposition that co-ops are not understood. They are not understood by legislators, banks and a whole range of people out in the community. There are a whole range of different types of co-ops. It needs to be carefully thought through.

ACTING CHAIR: Absolutely. Ms Donnelly, you recommend national adoption of the CNL but you acknowledge that, whilst it commenced in New South Wales and Victoria in 2014, there has been little improvement in the number of cooperatives registered in those states. We have a framework that has been adopted. Why haven't we seen more Victorians and New South Welshman—and women—take it up?

Ms Donnelly : I cannot speak as to the number of cooperatives formed in Victoria, but there is very little published in New South Wales alone regarding statistical material. The latest information I can find from New South Wales Fair Trading is their annual report up until the end of 2014, which indicated that only 11 cooperatives had been formed in that 12-month period—and that only takes in half of the time that the CNL would have been commenced in New South Wales. In truth, from my experience in assisting smaller groups to form cooperatives in New South Wales, the major problem in forming a cooperative—at least here in this jurisdiction—is the administrative barrier formed by the registry of cooperatives; it is very complicated.

The senator asked the previous witness about whether there was any model or template constitution. There is. There is a set of model rules which are incorporated into national regulations under the CNL. So those states that have the CNL have a model constitution. It is quite a thorough document. But cooperatives, in order to incorporate one of the key parts of the legislation, have to draft their own active membership clause. The active membership clause requires the entity to state what its primary activities are and then indicate what support or contribution the members will make to that primary activity. In my experience, that has been the most difficult clause for people to draft.

ACTING CHAIR: Why?

Ms Donnelly : I think the reason for that is that the guidance material for drafting the active membership clause is very poor. I can understand it because I was back there then, but it clearly does not speak to ordinary people wishing to form a cooperative. Unfortunately, when proposed incorporators lodge their rules for approval with the registrar they are rejected. In more cases than not, the response is 'It doesn't work,' rather than 'You should improve it in this way.'

ACTING CHAIR: So there is no feedback? It is not an iterative process?

Ms Donnelly : It is not, that is right. It is a little bit of an us and them kind of a process. They are in some ways helpful but in other ways it clearly does not speak to the incorporators as they are. I think that can be improved quite easily just by the production of more information or regulatory guides. I do quite a bit of work for not-for-profit cooperatives who would be seeking registration under the Australian Charities and Not-for-profits Commission regime. In order to get your governance documents classified as having a charitable purpose it is important that you craft a purpose phrase in your governance documents. Quite neatly, that organisation has a series of example clauses. Even something as simple as that would, I am sure, assist.

ACTING CHAIR: Yes—'Insert name here'.

Ms Donnelly : Yes. Or, for an agricultural cooperative selling grain, it would say a member must contribute X kilos of grain per year, or something like that, rather than saying in broad legalistic terms that it must support or contribute to the affairs of the cooperative. So there are some simple ways in which to improve that.

The other thing, as I said before, is that it is, in my view, a largely administrative problem in the forming of cooperatives because the registrar in all states is entitled to take at least 28 days in order to approve a set of rules. If they send back a rejection saying 'This is not right' they can then take a further 28 days after the new clause is submitted. So eventually an incorporator who cannot get it right three or four times is adding yet another month—and the frustration of that and possibly the legal cost of doing so—into the formation of the set of rules.

Senator XENOPHON: Hence the loss of $17,000 or more.

Ms Donnelly : Yes. So it is those sorts of things. Also, in my experience, the registry takes almost a magnifying glass view to the rules that are submitted, even if they are submitted largely as the model or template rules. For example, only a few months ago I submitted a set of rules on behalf of a not-for-profit and one of the rules was rejected even though it complied with the national regulations. The response to that was that they did not think the regulations were right.

Senator XENOPHON: Did they put that to you in writing?

Ms Donnelly : Yes.

ACTING CHAIR: We would love a copy of that!

Senator XENOPHON: Yes, we want a copy of that. That's a beauty!

ACTING CHAIR: Classic!

Ms Donnelly : So it is those sorts of things that are a strain on incorporators in New South Wales. As I said, I am not sure about the administration in other states. But New South Wales is often looked to as the lead jurisdiction, so there is occasional discussion between registries. I do have something to say about the capital raising, but I am conscious that Mr Fisher might have something to say.

Mr Fisher : I would echo what Ms Donnelly has said. There are two things that I would like to tell you about and invite questions on. Firstly, there is the question of mutuality and taxation treatment. This is an area that is partly codified in the tax legislation but partly not. This is incredibly important for infrastructure and asset management especially in agricultural enterprise. We still rely a lot on the common law and there is a thing called the mutuality principle, which goes to the treatments of income amongst and between members of a cooperative or mutual. There is some guidance from the ATO about this, but it is probably time in Australia's history that this got dealt with and codified properly and brought out into the light where we can—

CHAIR: We will have the ATO before us tomorrow. Is there anything we should be focusing on with them?

Mr Fisher : Probably quite a few things in the one that Mr Lane has raised—

CHAIR: Obviously, around the clarification—

Mr Fisher : But it is additional—

Senator XENOPHON: With mutuality that is something that my good friends at Clubs New South Wales avail themselves of, is it not?

Mr Fisher : Yes.

Senator XENOPHON: You know those huge poker machine venues but there is a bit of—

Mr Fisher : I do not frequent those places very often and I do not usually work with those businesses, but I understand what you are talking about.

Senator XENOPHON: There is a bit of a difference between a club with 500 poker machines and the organisation we just saw—the voluntary parents' association—where clearly everything they do is aimed at a public good, but they can avail themselves of the mutuality principle because they are a registered club. Is that right?

Mr Fisher : I do not want to answer that in a legal way.

Senator XENOPHON: No.

Mr Fisher : I do not often work in that area, but what I can say is that there is a spectrum. There is a continuum of purpose, if you like, from hardnosed business that involves co-ops, mutuals and the mutuality principle, right through to not-for-profits and general goodness and this is okay. The co-op is a very flexible thing and it is very valuable for that reason. What I am alluding to is the confusion and potentially the expense for clients who want, for example, to work in irrigation or have water assets and farming assets and things held in common for working together, to get their sector of agriculture happening, where there is an ability to get capital and use it to set-up, run and maintain these assets over decades; rather than a short-term company style business focus of a few years. That is quite a challenge. You get large spikes and discrepancies in the amount of money that is required to renew, replace and look after this stuff going forward. So there is a way of doing it which is perfectly legitimate. A big part of the Australian agricultural landscape is that people work together to contribute on a mutual basis to the upkeep of this stuff, of the infrastructure, and that in tax is treated as non-assessable, non-exempt income. So the tax office looks at the mutuality principle—

Senator XENOPHON: In your submission at paragraph 3.4, Mr Fisher, you make reference, in the context of the push to develop Northern Australia, to the fact that there might be a better way of doing things through better alternatives offered by cooperative and mutual forms of organisations. So you are saying that could be a faster and perhaps better way of achieving the potential of the North.

Mr Fisher : Exactly.

Senator XENOPHON: But capital raising is a problem, is it not? It is a problem in Australia. As a neighbour, that is why we get so much foreign investment here because they see the potential of our prime agricultural land, but we do not seem to have the mechanisms for local investors and for local communities to have access to capital to develop the land themselves.

Mr Fisher : Okay, and here we get to the really interesting stuff—not that the rest is not very important. A cooperative has benefits and values because it has local and involved membership—if I can put it that way. It also is able to more tenaciously and robustly hang on to its assets if it has them. It is harder to assets drip at a co-op. It is harder to break it up. It is harder to change control of it. These are great virtues. They can also be inhibitors to the free flow of capital and the recombination of economic assets and so on. But, if your policy goals are to build a vibrant, sustainable regional communities and to develop the north of Australia, then there is probably some risk attached to just coming in and setting up enormous mega-corp, feedlot style industry and have foreign capital there and people flying in and out. These are political and social questions.

I will cut to the chase about the capital question. Submission No. 28, from Mrs Apps, and No. 35, from Yenda, expressly go to this. They are very good submissions. They draw attention to an issue in the Australian Accounting Standards. When you are accounting for a cooperative enterprise in financial reporting, you are forced—because you have to follow AASB—to recognise members equity, or what would be share capital, as if it is a liability in the sense of a debt. It sits on that side of the balance statement where equity usually sits—it is portrayed in two columns—but it sits above the line and it sits in with liabilities. So, if equity equals assets minus liabilities, you end up in a worse situation. If you are trying to attract debt financing, it looks worse and you are less likely to get it. So there is the problem. With your permission, I would like to show you the problem in black and white, if I can hand you a document from AASB 132.

ACTING CHAIR: Thank you.

Mr Fisher : Those other submissions refer essentially to what you see here. I have extracted—I guess ignoring copyright and under the aegis of parliamentary privilege, which I hope applies—a part of what is known as AASB 132, which talks about how you characterise numbers in financial instruments. What you see on page 77 is an illustration of how this accounting standard suggests or requires that numbers be portrayed in a cooperative or mutual fund. This is just illustrative. I would like to be on record that I drew this from an older version of AASB 132, but it is number-for-number and word-for-word identical with the 2015 version.

The best place to start is if you go to pages 80 and 81. On page 80 is a table headed 'Statement of financial position as at 31 December'. You see, as you would expect to find usually, assets in the top section. Then you see, as you would expect, liabilities under that. When equity is dealt with, you can see that what is called equity here, as reserves and revaluation surplus and retained earnings and so on, is stripped out, and they have also extracted and taken out members interests as if it were share capital. It says here, 'repayable on demand separately'. It is itemised separately.

Senator XENOPHON: Is this under 'Share capital repayable on demand'?

Mr Fisher : Yes. For example, you will see No. 202 there. If you go back to the liabilities section, you will see it again: '202—Share capital repayable on demand'. This AASB follows the international standard. The issue originated, it seems, in Europe 10 or more years ago, and we have followed this. So, now in Australia, co-ops are obliged to follow this method of accounting for their equity so that, effectively, when they are being looked at as a funding prospect or for debt finance, they are in a worse position. So the simple solution here would be to change AASB 132—and anything related to that—so that that did not apply to cooperatives. There are good reasons why it should not apply to cooperatives, which is too much detail—

ACTING CHAIR: So why has Europe, which has a strong history of cooperatives—if you think of Norway, Sweden et cetera—chosen to treat cooperatives in this way?

Mr Fisher : Sorry. The detail is not in my field, but I understand it was to do with cooperative banks, so it is more of a bank issue rather than a regular—

ACTING CHAIR: So it is not letting all cooperatives but certain types of cooperatives?

Mr Fisher : Yes, I think that is what has happened. Could I just add to this?

ACTING CHAIR: Yes.

Mr Fisher : It is not necessary to create a large solution for this problem. You can change AASB. You can also do something else: under the CNL regulation under the act, you can make a rule or a regulation that says that you do not have to follow a particular accounting standard. This might be as simple as making a regulation that says, 'Skip that bit,' and changing it so that the members' equity part of the co-op's books looks a bit more regular and as we feel it should look.

ACTING CHAIR: Reflective of it?

Mr Fisher : Yes. So that is a simple solution to that. I would be very happy if you tasked me with writing you a letter just setting this out by the end of next week.

ACTING CHAIR: Yes. I had, 'draft regs?' That would be great.

Senator XENOPHON: That would be very useful. What do you think the resistance will be in terms of ASIC? Where would the pushback come from, do you think?

Mr Fisher : I could not name a name that would be possible—

ACTING CHAIR: We might be able to ask them, if we can get those draft regs.

Mr Fisher : I would just say this, however: in my various dealings throughout the world and travels around cooperatives and business, there is a tremendous sense of bureaucratic inertia that I encounter and, as I said earlier, an over-focus on company models of doing things. Perhaps an example—and this is not part of my submission—is that I understand that Aboriginal cooperatives are entering a period where they are experiencing great pressure to demutualise and go into company form in order to qualify for Commonwealth funding. It is just a tragic thing, if that is being forced.

ACTING CHAIR: Which brings me to one of my questions of Mr Lane, I think. The National Stronger Regions Fund, which obviously wants to see money delivered into regional areas, excludes the cooperative model. You made some comments in your—

Mr Lane : Yes, because one of the eligible criteria is that you have to be what is called a not-for-profit organisation. On one definition, of course, cooperatives are not-for-profit because they have revenue expense and there is a surplus. So you can put an argument that it is not-for-profit, but I would be as certain as I could be that those administering the fund would say, 'Sorry, you're a "for-profit",' because in the way that co-ops account there is a bottom line which says 'profit'.

ACTING CHAIR: Yes. We might check that with the minister's office, I think.

Mr Lane : So it is a matter for government rather than the parliament. It just seems to me that it is not recognised that co-ops are the ones that generate wealth in regional communities and that the trickle-down effect is immense.

Senator McKENZIE: Did you have any questions?

Senator XENOPHON: I would be interested to get those documents that we wanted on notice. That would be very useful.

ACTING CHAIR: In terms of the cooperative way of managing water assets, does that differ across jurisdictions, Mr Fisher? Can you see some challenges?

Mr Fisher : It is different.

ACTING CHAIR: Yes.

Mr Fisher : Yes. Water is the most exciting, most contentious, most vexed and most important thing.

ACTING CHAIR: I am heading off to a Murray-Darling Basin inquiry next week. But, even on notice, perhaps you could put your mind to how different jurisdictions may support a cooperative model around management of water assets and infrastructure. I know you have gone to the Ord, and promoting that from a northern Australia perspective, where it is a bit of a black space—that we could set up these types of operations. But I am probably thinking about northern Victoria, Riverland—

Mr Fisher : Okay. I would very happily write to you on this topic.

ACTING CHAIR: Excellent. Thanks, Mr Fisher.

Senator XENOPHON: I think we have time—a week and a bit, the end of next week, if there is anything else arising out of these things. I guess our challenge is going to be to make recommendations that we will want the government to take on board. We do not want this to be just an exercise that so much energy has gone into, through all those who have made submissions, and nothing comes of it. I think we are both very determined for something good to come out of this. Thank you.

Mr Lane : For my part, like Mr Fisher, I would be more than happy, if anyone wants any further work done on any of the suggestions I have made, to do that extra work.

ACTING CHAIR: We might call on you. Thank you very much. We really appreciate your expertise.

Ms Donnelly : And for my part, I am happy to provide any further information about non-distributing versus distributing cooperatives or the issue of capital by a cooperative.

Senator XENOPHON: That might be useful, I think, for us. You live and breathe this; we do not.

Ms Donnelly : Under the existing legislation and indeed under the CNL there are two broad types of cooperatives. One is a distributing cooperative, and the other is non-distributing. A distributing cooperative always has shares, but under the non-distributing model you can have either no share capital or a share capital. The no-share-capital, non-distributing cooperative is about the same or a similar type of model, if you like, to a company limited by guarantee. Both of the non-distributing cooperative types, whether they have a share capital or not, meet the income tax law definition of a not-for-profit. So, they are capable of being registered through the ACNC if they have a charitable purpose as well. So, they are both not-for-profits. They do not distribute surplus to their members.

Senator XENOPHON: It is a parallel system of registration, then, isn't it?

Ms Donnelly : It is.

ACTING CHAIR: Is there mutual recognition on the way through?

Ms Donnelly : Of not-for-profits? As not-for-profits they do not have to register with the Australian Charities and Not-for-profits Commission yet, because it is set up only to registered charities. But if they wish to register as a charity in order to get tax-exempt status as a charity then there is a dual registration. It is the same as for any other corporate entity. The thing about a non-distributing cooperative with a share capital—which we often associate with a profit based organisation—is that share capital in a cooperative, non-distributing or distributing, has a fixed par value, so it cannot be traded on a stock exchange. In both cases if the capital is repaid either on winding up or during the course of the cooperative's existence, only the par value is returned to members. For a non-distributing cooperative there are no dividends on that share capital. So, it is a means by which a non-distributing not-for-profit organisation can actually ask its members to contribute to start-up capital or to fund capital expansion, but it is returnable, which is one of the reasons the AASB 132 applies to cooperative share capitals—because it is returnable to the shareholders or members.

In a distributing cooperative you can issue both dividends on the shares and rebates based on business done with the cooperative, which is the traditional way of doing it. And in a non-distributing cooperative with a share capital—I do not want the committee to think that they cannot be a profit focused organisation—they will still deliver services to their members which will deliver a surplus to individual members. For example, cooperative bulk handling in Western Australia is a non-distributing share based cooperative. The benefits that its members get are in the delivery of best-price services for their own businesses.

Senator XENOPHON: It is huge though, isn't it?

Ms Donnelly : It is huge; that is right. And this leads into the question of the tax position of cooperatives. Generally—and I will leave CBH out of this for the moment—they are taxed the same as other companies. The definition of a cooperative under the tax act is for a cooperative company; it does not rely on it being actually registered as a cooperative but that it meets particular criteria. The effect of those provisions is that it permits a cooperative company to be taxed either at the entity level or at the member level. So, if it distributes all of its surplus to its members, it will then report either a nil or a modest income because the return is taxed in the members' hands as lower cost for their profits. So, there is no loss of tax in the system; the only benefit is of course the one that Mr Lane refers to in terms of the tax deductibility of capital and interest repayments on government-provided loans.

One of the other things I wanted to talk about in terms of the AASB 132 matter—and I have already referred to it—is that it is classified as a liability because of its capacity to be repaid. Under the CNL, share capital does not have to be repaid. It depends on the constitutions of the cooperative. In any event, if there is a request to repurchase shares by a member, it is limited to five per cent of the paid-up capital. Compared with a company, which can go through a reduction of capital of 10 per cent every 12 months, it is very difficult to see a justification for applying the rule differently to a cooperative on the basis that a company can reduce its capital as well. I know it does not happen as often, but, similarly, in practice it does not happen all that often in a cooperative, because members actually stick with the cooperative conservatively for the longer term. So, there is often not a repurchase request.

ACTING CHAIR: Thank you. I have just one final question, and then we will be heading into break. A lot of your submissions go to making it mandatory in law schools to have units around understanding cooperatives. It might have saved our previous witnesses $17,000 if their lawyers—

Senator XENOPHON: Don't make me go back to law school!

ACTING CHAIR: So, is this a decision for deans of law in individual universities? Is it the registering bodies, law councils and the like that sort of deem that to be one of the criteria in order to become a registered lawyer? Where do we focus our attention, then, to make that one happen?

Ms Donnelly : Perhaps I could address that briefly. My experience is teaching not in a law school but in a business school, so the accreditation for a bachelor of accounting or a bachelor of business comes from the professional accounting bodies, and they determine the course content for business organisations law, and they require business students to learn about being a sole trader, partnership, company, trust.

ACTING CHAIR: So, we just need to get them to agree to add cooperative to that list. What conversations have you all had with that body around adding that to the list? What is the aversion?

Mr Lane : I think it fundamentally comes back to a lack of understanding of the importance of cooperatives in Australia's commercial life. I think that is fundamentally the situation. And in my experience there is the focus in universities more on traditional commercial corporate life rather than on regional commercial life. And it is not just the economic benefits that flow in regional communities; it is all the social benefits. And that is not ever at the forefront of universities' thinking. But perhaps I can just conclude with reinforcement of the point I may have made earlier that in my experience banks and bankers, in assessing applications for loans and whatever, do not understand cooperatives, because they go through business schools, perhaps, and are not taught it. And frustrations of dealing with banks are profound.

ACTING CHAIR: So, it is law schools and business schools.

Mr Lane : And a lot of youngsters these days do combined law and commerce, or economics or whatever. Any course that has a focus on commerce, directly or indirectly, ought to be teaching cooperatives.

ACTING CHAIR: It is just that we cannot mandatorily require deans of law schools to make their courses look like this. So, is there some point where we can, which is through the professional bodies?

Mr Fisher : The Legal Practitioners Admissions Board.

ACTING CHAIR: And the equivalent for accountants.

Mr Lane : And possibly law societies in the case of the legal profession, because law societies do have connections into universities and business schools.

ACTING CHAIR: Thank you. That is a long-term goal.

Proceedings suspended from 10 : 24 to 10 : 34