Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 10 Same asset rollover
Outline of chapter
10.1 Schedule 11 to this bill amends the ITAA 1997 to insert Subdivision 126-D, which allows a CGT rollover for a policyholder/member of a mutual insurance company who becomes absolutely entitled to a share held on trust after the trustee replaces demutualisation shares with other shares under a scrip for scrip rollover.
Context of amendments
10.2 The insurance demutualisation provisions in Division 9AA of the ITAA 1936 provide CGT relief in certain circumstances. However, relief under those provisions is not available where, for example:
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- a trust holds shares on behalf of policyholders/members who cannot be located at the time of the demutualisation; and
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- the demutualisation shares are exchanged for shares in another company as part of a scrip for scrip transaction before the policyholders/members become absolutely entitled to the shares as against the trustee.
10.3 Currently, there is a CGT event when the policyholder/member becomes absolutely entitled to the shares. This may inappropriately give rise to a capital gain or loss to the trustee, and result in an inappropriate outcome for the policyholder/member.
Summary of new law
10.4 These amendments will ensure that a CGT rollover is available where, following a demutualisation of an insurance company:
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- a trustee holds shares on behalf of a policyholder/member;
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- the shares are exchanged by the trustee for new shares, and the trustee chooses scrip for scrip rollover for the transaction; and
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- the policyholder/member later becomes absolutely entitled to the new shares.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| The trustee will not have any CGT consequences when the shares are transferred to the policyholder/member. | The trustee may have a CGT liability when the shares are transferred to the policyholder/member. |
Detailed explanation of new law
10.5 These amendments include in the CGT provisions of the ITAA 1997 a new same asset rollover. The new rollover applies when a CGT event happens as a result of a policyholder/member becoming absolutely entitled as against the trustee to certain shares as part of a demutualisation of an insurance company.
10.6 The current law does not disregard a capital gain or loss made by the trustee if there has been a scrip for scrip rollover before the policyholder/member becomes absolutely entitled to the shares. The new shares acquired by the trustee are not demutualisation shares for the purposes of Division 9AA of the ITAA 1936. If there is no scrip for scrip transaction, section 121AS of the ITAA 1936 disregards a capital gain or loss arising from that CGT event.
10.7 The new rollover applies if:
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- as a result of a demutualisation of an insurance company, a trustee holds shares on behalf of a policyholder/member;
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- before the policyholder/member becomes absolutely entitled to the shares, the trustee exchanges those shares for new shares and chooses a scrip for scrip rollover; and
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- the policyholder/member later becomes absolutely entitled to the new shares.
[Schedule 11, item 4, section 126-190]
10.8 If these conditions are met, any relevant capital gain or loss the trustee makes is disregarded. In addition, the first element of the cost base and reduced cost base of the new shares to the policyholder/member equals the cost base and reduced cost base of those shares to the trustee just before the relevant CGT event happened. [Schedule 11, item 4, section 126-195]
10.9 For the purposes of claiming the CGT discount the policyholder/member is treated as acquiring the new shares when the trustee is taken to have acquired them (see subsection 115-30(1), item 1 in the table of the ITAA 1997).
Application and transitional provisions
10.10 The amendments are beneficial to the affected policyholders/members and apply from 10 December 1999, being the date of effect for the CGT scrip for scrip rollover provisions.
Consequential amendments
10.11 An item is added to the table of same asset rollovers in section 112-150 of the ITAA 1997. Also, a signpost is inserted in the demutualisation of insurance companies and affiliates provisions in Division 9AA of the ITAA 1936 and in the scrip for scrip rollover provisions in Subdivision 124-M of the ITAA 1997. These signposts alert readers to the new rollover. [Schedule 11, items 1 to 3]