The ATO has published a Decision Impact Statement on how it will administratively treat the Full Federal Court decision regarding the tax treatment of the Bendigo Bank franchise set up by Wentworth District Capital Ltd (discussed here).

The ATO’s view is that while it accepts that the facilitation of certain commercial services in certain circumstances is capable of amounting to community service purposes within the meaning of Item 2.1 of section 50-10 of ITAA 1997 as determined by the Full Federal Court, whether that will be so in any particular case is a question of fact and circumstances. In the ATO’s view the court did not go so far as to hold that every community bank will qualify as providing a community service.

The Senate Economics Committee Report on Competition within the Australian banking sector contains a number of recommendations with specific relevance to mutuals:

• Recommendation 18
  11.73 The Committee recommends that mutual financial intermediaries be allowed to refer to themselves as a ‘mutual bank’ or ‘approved banking institution’ and use terms such as ‘credit union bank’ in their name.
• Recommendation 35
  15.18 The Committee recommends the taxation arrangements applied to bank deposits and mutual ADI deposits should be reviewed by the inquiry into the financial system.
• Recommendation 36
  15.24 The Committee recommends that the Government require Treasury to review the GST input tax arrangements for mutual financial intermediaries having regard to the comments in the Henry Tax Review.
• Recommendation 37
  15.33 The Committee recommends that the Government require Treasury to review the treatment of building societies and credit unions in the franking credit arrangements and report publicly on the advantages and disadvantages of various options.

The Government Senators also issued a minority report including the following:

• Recommendation 4
  The government senators recommend the Government continues to work in developing the market for bullet RMBS as an alternative to traditional RMBS. This will help smaller lenders diversify and broaden their funding and access cheaper funding to compete more effectively.
• Recommendation 5
  The government Senators recommend that the Government’s commitment to allow banks and mutuals to issue covered bonds should remain a priority of the Government.
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  Posted 9th May 2011 by David Jacobson in Legal, Mutuals

In Commissioner of Taxation v Wentworth District Capital Limited [2011] FCAFC 42 the Full Court of the Federal Court dismissed an appeal by the Commissioner of Taxation from the trial judge’s decision that Wentworth District Capital (WDCL) is an association established for community service purposes within the meaning of Item 2.1 of s 50-10 of the Income Tax Assessment Act 1997 (Cth) and that the whole of its income is exempt from income tax.

WDCL, a company limited by guarantee, was incorporated to manage a franchised office of Bendigo Bank in Wentworth NSW after the last major bank closed. The success of the branch has been such that the fees received by it have generated a profit.

Although it was accepted that banking services to customers of a commercial bank were not a community service, the Court decided that WDCL was within the exemption : the main or dominant purpose for which it was established was a community service…the community service purpose was the facilitation of face-to-face banking services which provided a substantial benefit to the community of Wentworth that was both real and tangible.

” WDCL was not established to help Bendigo Bank. WDCL was incorporated to provide a solution to the problem of the absence of face-to-face banking services in Wentworth. As the Commissioner accepted at trial and on appeal, the purpose of WDCL was not to provide banking services in Wentworth and it did not do so. BBL Wentworth conducted the business of banking. ..
From the outset, WDCL was established to facilitate (without profit to the company or its corporators) face-to-face banking in Wentworth by making it commercially viable for Bendigo Bank to operate in Wentworth. …The facilitation of face-to-face banking in Wentworth remained its purpose in the 2006 and 2007 years, during which there was no bank in Wentworth other than Bendigo Bank. The conduct by WDCL of the shop front operations of Bendigo Bank on a not-for-profit basis continued its purpose of facilitating the provision of banking services in Wentworth. “