Proposed tax dispensation for co-operative banks



  1. Before 2006 – co-operatives where taxed like any other large business. In the 2006 Budget a proposal was made that the tax dispensation of Co-operatives follow that of small businesses.


  1. Principles of taxation


a)       Simplicity – compliance & administration

b)       Equity & fairness – treat those alike – the same way – and vice versa

c)       Economic efficiency – non distortionary i.e must not create tax abritage

d)       Politically justifiable

e)       Revenue buoyancy – must raise revenue


  1. Co-operative banks – are built on “Co-operative” Principles. However – the nature of their business is unique – deposit taking and providing financial services – and carries types of risk that other types of co-operatives do not necessarily face. As a result they have to comply with very stringent prudential requirements (similar to commercial banks) as stipulated under Section 20 of the Bill– to:


a)       strengthen the financial soundness and stability of co-operative banks

b)       Protect their solvency and viability

c)       Ensure survival in times of adversity

d)       Prevent the repercussions of systemic failure in the financial system


  1. Proposed tax treatment of co-operative banks


a)       While the co-operative bank is still in the process of building towards meeting the prudential requirements – it should be tax exempt. During this time – the co-op bank is not allowed to redistribute any patronage refund


b)       When all the prudential requirements have been met – the co-op bank will be taxed – according to the smme regime (similar to other co-operatives). Up to R43 000 of taxable income (after deducting all allowable expenses) will be tax exempt


c)       Any distributions (patronage refund) will be taxed in the hands of the members


d)       Further details of how this will work to be threshed out with tax policy and SARS


e)       Reserve Fund - We also propose that Section 20 (d) – not entirely follow the provisions of the Co-operatives Act – where it stipulates the reserves may be used as stipulated in the constitution. We propose that a portion of these reserves be kept by the Agency – as a prudential measure (like commercial banks) and put a condition that these reserves be non-distributable.