Union Tax

Source: Australian Financial Review 

The ACTU claims that changes to our workplace relations framework are needed to address insecure work and flat lining wage growth. But at a time when unions are making record profits from side ventures while membership rates sit at record lows, the tax-free status of unions as non-for-profit organisations is ripe for reform.

Major unions like the CEPU, AWU, and United Voice all earn annual incomes of over $60 million and hold assets worth more than $120 million. With income nudging $150 million and assets in excess of $310 million, the CFMMEU is a financial titan whose earnings outstrip major private companies like Kennards Self Storage, Greyhound buses and the Australian arm of Fuji Xerox.  Meanwhile, private sector union membership has fallen from more than four in ten workers in the early 1980s to an all-time of low 9.3 per cent.

What explains this paradox?

The answer lies in two fundamental changes made to Australia’s workplace framework in the 1990s: enterprise bargaining and compulsory superannuation.

Unions have used their position as de-facto employee representatives in enterprise bargaining to establish lucrative streams of side-revenue from outside their membership lists. Enterprise agreements mandating contributions into union-affiliated employee benefit schemes, such as redundancy funds, income protection insurance, and portable sick leave schemes (among others) deliver the biggest trade unions $25 million each year.

This income represents the proceeds of a complex web of commissions and kickbacks that are ultimately sourced from payments intended for the benefit of workers. Despite these arrangements being locked into around 30 per cent of enterprise agreements, they are largely hidden from workers’ eyes.

There is an obvious unfairness in benefits like sick leave, income protection insurance, or redundancy being used to fund kickbacks to trade unions. Closed shops may have been outlawed, but workers covered by these agreements have no way of preventing what is effectively a slice of their salary being skimmed by a trade union they aren’t necessarily even a member of.

But more than that, it presents a clear conflict of interest in enterprise bargaining. How can workers trust trade unions to negotiate their pay and conditions with undivided loyalty if their union representative has their own personal stake in what’s on the table?

The advent of compulsory superannuation has also been a boon for the union movement. Between 2013/14 and 2016/17, trade unions received over $18 million in director’s fees from industry super funds.  Again, the dominance of industry super funds isn’t the product of an informed choice made on the part of workers. It’s the result of industry funds being locked in as the default super provider under two thirds of awards, and the fact that unions have leveraged their influence in enterprise agreements to ensure 2 million workers have no choice but to contribute to a union-backed fund.

If you want to understand how the CFMEU was able to maintain the union’s movements healthiest bank account position as Australia’s most cashed up union despite being, as put by Federal Circuit Judge Salvatore Vasta, “the most recidivist offender in corporate history”, the rivers of gold provided by industry superannuation and enterprise bargaining provide a clue.

This new paradigm in which trade unions are increasingly financed by workers who aren’t on their membership lists calls into question several features of our workplace relations system.

It highlights the absurdity the legislative monopoly gifted to existing trade unions over entire sectors of the workforce. Under the current law, an employee group will not be afforded any of the privileges of a trade union, such as recognition and standing in the Fair Work Commission, if there’s already an existing union to which they could conveniently belong. This legislated ban on competition in worker representation denies workers choice while protecting the streams of revenue enjoyed  by the existing group of affiliated unions.

But above all, it underscores the need to revisit the tax-free status of trade unions as non-for-profit organisations. The exemption from income tax granted to unions reflects the tax principle of mutuality, whereby an organisation cannot derive taxable income from trading within itself. Mutuality makes sense in relation to trade unions – but only to the extent that their income is obtained from dues paid by its members.

Yet in light of the growing share of trade union revenue that’s derived from what are in substance commercial activities, that justification can no longer be sustained.

Unions’ tax-free status doesn’t exist in a vacuum. It adds up to a distinct advantage over businesses seeking to start or acquire a business in sectors which unions now operate, namely commercial real estate, insurance and other financial products.

If unions want to moonlight as insurance brokers, investors and entrepreneurs, it’s time to level the playing field. That means changing the rules so trade unions pay tax on income received from commercial ventures.