Australia’s 1994 shock reinforces the importance of protecting credit unions’ tax status

After Australia repealed credit unions' income-tax exemption in 1994, the industry headcount plunged from hundreds of community lenders to fewer than 40 branded entities. Fees rose and growth slowed. Industry analysts say this example offers the clearest evidence yet that taxing member-owned cooperatives can erode competition and local access in just a few years.

When Australia's federal government stripped the nation's credit unions of their tax status in 1994, it fanned the flames of an industry contraction in which eight out of every 10 cooperatives vanished between 1973 and 2006. The Australian credit union movement peaked at 833 credit unions, and by 2006, only 149 remained. Many being absorbed by bigger players or rebadged as "mutual banks."

"We don't need to speculate," Cornerstone League CEO Caroline Willard cautioned U.S. peers in a recent CUInsight op-ed regarding how the United States credit union industry could be affected if a similar change happens here. "Just look at Australia."

Within two years of the change, large Australian credit unions shifted from paying zero company tax to a 20% transitional rate; by 1997-98 they faced the full 36% corporate rate—surrendering margins once recycled into member pricing and capital buffers.

Willard argued that the 80% wipeout abroad foreshadows what U.S. cooperatives could face if Congress ever follows the same path: higher costs, rapid consolidation, and fewer safe lending choices.

What triggered Australia's tax reversal?

Credit unions in Australia won their tax-exempt status in 1973, only to lose it two decades later in 1995.

The decisive blow came via the Taxation (Deficit Reduction) package of 1993, which removed an exemption for credit union interest income. Larger institutions officially lost their status in the 1994-95 income year; smaller ones followed in 1995-96. A temporary 20% rate softened the landing, but by 1998, every credit union faced the same tax rate as banks. Today, a flat 30% applies.

Almost concurrently, credit union oversight migrated from state registrars to the national Financial Institutions Scheme and then to the newly created Australian Prudential Regulation Authority (APRA) in 1998, putting credit unions under exactly the same capital and reporting rules as banks.

Annual asset growth rate dropped from 17 % (1991-94) to 10.7 % (1998-2005), directly tied to weaker retained earnings and tougher capital rules, according to Filene. The resulting dip in after‑tax earnings slowed the pace at which credit unions could build capital buffers, a key factor regulators watch when approving growth plans.

Consolidation became survival

The one-two punch of taxation and full-scale prudential parity accelerated a merger wave. Industry tallies show the movement shrank from more than 700 credit unions in the 1980s to fewer than 40 credit union-branded entities by 2024. Many survivors rebranded as customer-owned "mutual banks" to stay competitive.

One example is Bank Australia, the product of 72 former credit unions rolled into a single national mutual bank with 20 billion Australian dollars in assets and nearly 300,000 members.

With fewer institutions, physical access also thinned. Credit union branches dropped from 1,028 in 2001 to 939 by 2003, leaving some rural towns searching for alternatives when major banks also withdrew.

Members felt both progress and pain

For members, the loss of the tax buffer meant slightly higher loan rates and slimmer deposit premiums, yet credit unions continued to outprice major banks on many core products by cutting expenses and pooling back-office tech.

Filene reported that noninterest income (fees/charges) nearly doubled after 1995 as credit unions tried to claw back lost revenue.

The regulatory upgrade did bring some positives: national deposit insurance (from 2008) and APRA oversight boosted confidence, enabling credit unions to issue debit cards, join real-time payments, and compete in the mortgage market without stigma.

Still, smaller communities felt the downside. As compliance costs rose, niche employment bonded credit unions either merged or closed, eroding the hyperlocal knowledge that once defined the sector and forcing some households toward payday lenders or the big four banks.

A cautionary mirror for U.S. lawmakers

Willard's op-ed framed Australia as the "control group" for any U.S. debate: once the exemption disappeared, economies of scale—not cooperative ideals—dictated survival.

"Loan rates and fees will increase, small credit unions may close, and rural communities will lose access," she wrote, urging American leaders to mobilize before the tax debate resurfaces.

Her warning aligns with the Australian data: taxation shaved credit union net margins by roughly a third, slowed capital accumulation, and ignited 30 years of consolidation that still has not stopped. Today, Australia counts fewer than 40 credit union-branded entities—about five percent of its 1970s peak—while the big banks enjoy a record share.

For U.S. credit union professionals, the lesson is blunt: tax status is not just a line in the budget—it is a guardrail that keeps cooperative banking diverse, local, and member-first. Australia's history shows how quickly that guardrail can vanish, and how hard it is to rebuild once gone.