By Felicity McLean.

It’s easy to see why the cooperative business model is popular, particularly among organisations with a purpose beyond profit. Unlike company shareholders, every member of a cooperative is an equal decision-maker, and members make all decisions collectively. 

“Cooperatives are run by the members for the members,” says Kevin Franey FCA, Partner, Audit & Assurance, TNR Chartered Accountants. Yet about half of all newly formed cooperatives don’t survive their first five years. So what pitfalls and pain points do cooperatives potentially face and how can CAs help? 

Check the Chartered Accountants ANZ cooperatives guide, which is part of the Rural Insight series, for more details about how a cooperative can be a valuable business structure, and details of the regulations and tax benefits.

1. Taxing benefits

“Like any other business structure, you want to make sure that you maximise the tax benefits associated with cooperatives,” says Franey. Particularly as cooperative tax benefits can be substantial. “Under the Income Tax Assessment Act, if a cooperative satisfies the rules for active membership [that is, it has an active membership of 90% or more], the cooperative may be eligible for Section 120(1)(C) deductions,” explains Franey. 

Section 120(1)(C) allows a cooperative to claim a tax deduction on the repayment of the principle and interest element of a loan for certain capital expenditure. This is a significant benefit. Similarly, if your client runs a cooperative that receives annual membership fees, those fees are exempt income under the Income Tax Assessment Act 1997. It’s important to understand the tax benefits available to cooperatives so you can advise clients accordingly.

2. Establishing a cooperative

If clients are thinking of establishing a cooperative, it is important to seek advice, says Franey. It’s also important to make sure the group’s members can work together. Cooperatives are all about collaborative decision-making, and group members should be realistic about whether they can reach a consensus on what the cooperative will do, how it will do it and what it wants to achieve for its members. “If your client is considering establishing a cooperative, make sure they seek advice from accounting and legal professionals who are experienced in cooperatives and mutuals so that member benefits are maximized,” says Franey.

3. Access to capital 

One of the main issues is the limited ability of cooperatives to fundraise, says Franey. “Remember, a cooperative is not like a company – you can’t just issue more shares.” In November 2017, the federal government announced amendments to the Corporations Act 2001 to allow cooperatives and mutuals to issue capital instruments without risking their mutual structure or status. The proposed changes will create a new class of cooperative equity share that will not require voting rights to be attached, and will allow dividends to be capped, in line with mutual business models.

Historically, cooperative shares could only be acquired by members (not via third party equity), which means they were restricted to fundraising via member contributions, retained earnings and/or debt. The introduction of cooperative capital units (CCUs) in the 1990s to non-members allowed cooperatives to fundraise via people outside the operation. However, CCUs are somewhat restrictive, says Franey.

The Rural Insight series includes a selection of guides for members working in rural areas, all written by members themselves. These practical Rural Insight papers tackle many of the challenges commonly faced by CAs based in rural and regional areas.

4. Share capital as a liability

At present, Australian and international accounting standards classify cooperative shares as a liability (see AASB132 Financial Instruments). However, the IASB seeks to address this. The IASB is undertaking a project on financial instruments with the characteristics of equity that may mean cooperative shares are bought under the definition of capital under AASB 132, says Franey.

5. How to benchmark the benefits?

While there’s no question cooperatives provide significant benefits to members, how do you benchmark these? “How do we better report the values that cooperatives bring to the table? It’s an important question to ask,” Franey says. The Business Council of Co-operatives and Mutuals (BCCM) is working with the AASB to raise awareness and an understanding of cooperatives and mutuals, as well as improving financial and related reporting. The aim is to better demonstrate the value cooperatives can provide for their members, and the broader community, he says. The aim for any such reporting is to quantify returns, and to capture this under fair value accounting requirements.

Facts about cooperatives

There are more than 2,000 cooperative and mutual enterprises in Australia, and eight in 10 Australians are members of a cooperative or mutual. Statistics drawn from the National Mutual Economy Report 2017 show:

• the top 100 cooperatives and mutual entities (CMEs) have combined turnover of $30 billion
• the turnover of the top 100 grew by 6.6% per annum over five years
• combined assets of the top 100 reached $152.9 billion in 2015
• there were 29 million active members of CMEs in 2016 – so clearly some people are members of more than one.

Acknowledgement

Kevin Franey FCA, Joshua Fletcher CA, and Kay Plummer FCA contributed to this article.

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Felicity McLean is an author and journalist.