If you hold a policy in a life insurance company or a general insurance company that demutualises, you may be subject to CGT either at the time of the demutualisation or when you sell your shares (or another CGT event happens).
A company demutualises when it changes its membership interests to shares, for example, AMP, IOOF and NRMA. There are similar rules if you are a member of a non-insurance organisation that demutualises.
The insurance company may give you an option either to keep your share entitlement or to take cash by selling the shares under contract through an entity set up by the company ('share sale facility').
If it is an Australian insurance company and you choose to keep the shares, you will not be subject to CGT until you eventually sell them or another CGT event happens. However, if you elect to sell your share entitlement to the company and take cash, you need to include any capital gain on your tax return in the income year in which you entered into the contract to sell the shares, even though you may not receive the cash until a later income year.
The demutualising company will write to all potential 'shareholders' and advise them of the acquisition cost in each instance, sometimes referred to as the 'embedded value'. Even though you did not pay anything to acquire the shares, they have a value that is used as the cost base and reduced cost base for CGT purposes.
If you sell your shares before the insurance company is listed on the stock exchange and you make a capital loss, you disregard the loss.
If you hold a policy in an overseas insurance company that demutualises, you may be subject to CGT at the time of the demutualisation. Phone us for advice if this applies to you.