A proposed new law will expressly permit mutual entities registered under the Corporations Act to issue equity capital without risking their mutual structure or status.The government introduced Treasury Laws Amendment (Mutual Reforms) Bill 2019 last week, introducing a definition of a mutual entity into the Corporations Act for the first time.It establishes mutual capital instruments as "a new bespoke capital instrument for mutual entities".The bill also removes some uncertainties from the demutualisation provisions affecting mutual financial institutions.The provisions in the bill are in response to the Hammond Report in 2017, which provided advice to the government on how to reduce barriers to enable co-operatives and mutuals to invest, innovate, grow and compete.The information memorandum accompanying the bill says: "The new definition of mutual entity addresses the lack of recognition and understanding of the mutual sector."For the record, the definition of a mutual is as follows: "A mutual entity is a company where each member has no more than one vote for each capacity in which the person is a member."The definition does not create or alter any other rights for mutuals, including in relation to tax obligations or rights in relation to mutual receipts.The definition only applies to mutuals registered under the Corporations Act and does not have any effect on other entities that may have similar governance arrangements.Mutual capital instruments have some distinctive features, including a restriction on the mutual entity's ability to vary or cancel class rights. Dividends must be non-cumulative and shares can only be issued as fully paid.The change to the Corporations Act follows a recent move by the Australian Prudential Regulation Authority to rectify a disadvantage experienced by mutuals, compared with banks, in the tax treatment of similar instruments. Mutually owned ADIs had not been able to issue Tier 2 capital instruments convertible into mutual equity interests in a cost-effective manner, as these instruments are considered as contingent equity interests rather than debt interests for income tax purposes.APRA requires that Tier 2 capital instruments issued by ADIs include a non-viability condition as a loss absorption mechanism. It requires capital instruments to be either written off or converted to common equity. APRA revised its standard to allow mutual ADIs to issue mutual equity interests.