House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 3 Demutualisation of friendly societies

Outline of chapter

3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide relief from capital gains tax (CGT) to members and insured entities of friendly societies that have a life insurance business and/or a private health insurance business and the friendly society demutualises to a for-profit entity.

3.2 All references to legislative provisions in this chapter are references to the ITAA 1997 unless otherwise stated.

Context of amendments

3.3 Friendly societies may provide life insurance, private health insurance, aged care and other services to their members or other entities. These amendments will provide CGT relief for members or insured entities of a friendly society with a life insurance and/or a private health insurance business that demutualises to a for-profit entity. The CGT relief is broadly equivalent to that which is available when a stand-alone life insurer or private health insurer demutualises.

3.4 Demutualisation is the process by which participants of a mutual fund (such as a friendly society) give up their rights to participate in the fund. In effect, this involves the participants giving up the right to benefit in the future from any accumulated mutual surplus that has been (or may be) built in the fund. Upon demutualisation there is effectively a distribution of any accumulated mutual surplus to the participants. Ordinarily, this triggers a CGT taxing point.

3.5 Division 9AA of the Income Tax Assessment Act 1936 (ITAA 1936) provides that any capital gains or capital losses that arise on these transactions for members and policyholders of life insurers and general insurers that demutualise are disregarded. In addition, Division 9AA of the ITAA 1936 provides a cost base for shares issued to policyholders and members of demutualising life insurers that is based on the life insurer's embedded value . Division 9AA of the ITAA 1936 also provides a cost base for shares issued to policyholders and members of a demutualising general insurer that is based on the general insurer's net tangible assets .

3.6 Division 315 of the ITAA 1997 provides that any capital gains or capital losses that arise on these transactions for policyholders of a private health insurer that converts, by demutualising, to a for-profit entity are disregarded. Division 315 of the ITAA 1997 provides a cost base for shares issued to policyholders of a demutualising private health insurer that is based on the private health insurer's market value .

3.7 Division 9AA of the ITAA 1936 provides relief only when members or policyholders of the insurer receive their share of the distributed accumulated mutual surplus in the form of shares in the demutualised insurer or an entity that ends up wholly owning the demutualised insurer. Division 9AA of the ITAA 1936 also requires the demutualised insurer or the holding company to become a listed company, generally within two years of demutualising.

3.8 In addition, Division 9AA of the ITAA 1936 may not be available for friendly societies that have a life insurance business held in a wholly owned subsidiary.

3.9 These amendments will therefore provide relief for demutualising friendly societies in a broader range of situations. Specifically, relief will be available when the friendly society demutualises to a for-profit entity regardless of whether the society distributes its accumulated mutual surplus in the form of shares or an amount of money (or both). Further, there will be no requirement that the demutualised friendly society become a listed entity.

3.10 This is similar to the scope of the relief available for demutualising private health insurers contained in Division 315 of the ITAA 1997.

Summary of new law

3.11 Schedule 3 amends the ITAA 1997 by inserting Division 316 into Part 3-32. This Division disregards various capital gains and capital losses that may arise when a friendly society demutualises to a for-profit entity.

3.12 Specifically, Subdivision 316-B disregards capital gains and capital losses that arise to members and insured entities of the friendly society under its demutualisation, except when the member or insured entity receives an amount of money.

3.13 In cases where the member or insured entity receives an amount of money, these amendments modify the cost base rules applying to the relevant asset (an interest affected by demutualisation ) so that the member or insured entity may realise a capital gain or capital loss. This modification ensures that members and insured entities that receive money are treated equivalently under CGT to members and insured entities that receive an allocation of shares and immediately dispose of them. These rules are contained in Subdivision 316-B and Subdivision 316-C.

3.14 Subdivision 316-C also sets out the rules for calculating the cost base of shares and rights to acquire shares that are issued under the friendly society's demutualisation to its members and insured entities.

3.15 Subdivision 316-D disregards capital gains and capital losses and sets out other CGT consequences that arise when shares or rights to acquire shares are subsequently transferred to members and insured entities of the friendly society after the demutualisation.

3.16 Subdivision 316-E sets out special rules for successors of a deceased member or deceased insured entity that receive shares or rights to acquire shares that would have otherwise been issued to the member or insured entity under the demutualisation.

3.17 The non-CGT consequences of the friendly society's demutualisation are set out in Subdivision 316-F. This includes a reduction to the demutualising friendly society's franking account.

Comparison of key features of new law and current law

Detailed explanation of new law

3.18 A friendly society is defined in section 995 of the ITAA 1997 as being:

•

a body that is a friendly society for the purposes of the Life Insurance Act 1995 (LIA 1995);

•

a body that is registered or incorporated as a friendly society under a State law or a Territory law;

•

a body that is permitted, by a State law or a Territory law, to assume or use the expression friendly society; or

•

a body that, immediately before the date that is the transfer date for the purposes of the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999 , was registered or incorporated as a friendly society under a State law or a Territory law.

Eligible demutualisations

3.19 The demutualising friendly society must satisfy the following requirements for this relief to be available.

3.20 Prior to demutualising, the friendly society must carry on either a health insurance business or a life insurance business. A friendly society that carries on both a health insurance business and a life insurance business also qualifies for the relief. These businesses may be carried on through a wholly owned subsidiary of the friendly society. [ Schedule 3, item 1, paragraph 316-5(a )]

3.21 The entity that carries on the health insurance business (either the friendly society or a wholly owned subsidiary) must be a private health insurer within the meaning of the Private Health Insurance Act 2007 (PHIA 2007) [ Schedule 3, item 1, subparagraph 316-5(a )( i )].

•

A friendly society that carries on only a health insurance business may qualify for this relief and is therefore excluded from the demutualisation relief contained in Division 315 of the ITAA 1997 [ Schedule 3, item 22 ].

3.22 The entity that carries on the life insurance business (either the friendly society or a wholly owned subsidiary) must be registered under section 21 of the LIA 1995 [ Schedule 3, item 1, subparagraph 316-5(a )( ii )].

•

A friendly society that carries on a life insurance business may qualify for this relief and is therefore excluded from the demutualisation relief contained in Division 9AA of the ITAA 1936 [ Schedule 3, item 2 ].

3.23 A friendly society that carries on neither a health insurance business nor a life insurance business will not qualify for this relief. However, such a friendly society may qualify for the demutualisation relief contained in Division 9AA of the ITAA 1936 (if the friendly society is a general insurer) or Schedule 2H to the ITAA 1936.

3.24 It is also a requirement of this relief that the friendly society must not have capital divided into shares that are held by its members prior to demutualising. [ Schedule 3, item 1, paragraph 316-5(b )]

3.25 After demutualising, the friendly society must be carried on for the object of securing a profit or pecuniary gain for its members. [ Schedule 3, item 1, paragraph 316-5(c )]

Example 3.1

Friendliest Friendly Society Ltd (Friendliest Friendly) is a company limited by guarantee and a body that is permitted by a State law to use the expression friendly society. Among its other businesses, Friendliest Friendly provides life insurance to its members.

Consequently Friendliest Friendly is registered under section 21 of the LIA 1995.

Friendliest Friendly proposes to demutualise to a for-profit entity. Should it demutualise, Friendliest Friendly qualifies for this relief.

Example 3.2

Affable Society Ltd (Affable Society) is registered as a friendly society under a State law and is a company limited by guarantee. It has two wholly owned subsidiaries - one of which carries on a private health insurance business and the other which carries on a life insurance business.

•

The subsidiary that carries on the private health insurance business is a private health insurer within the meaning of the PHIA 2007.

•

The subsidiary that carries on the life insurance business is registered under section 21 of the LIA 1995.

Affable Society proposes to demutualise to a for-profit entity and, as part of a broader merger arrangement with a for-profit private health insurer Healthy Health Ltd (Healthy Health), become wholly owned by Healthy Health.

Should it demutualise, Affable Society qualifies for this relief.

Example 3.3

Benevolent Company Ltd (Benevolent Company) is a company limited by guarantee and a body that is a friendly society for the purposes of the LIA 1995. It carries on a life insurance business and is registered under section 21 of the LIA 1995.

Benevolent Company proposes to demutualise and become a for-profit entity.

Should it demutualise, Benevolent Company qualifies for this relief.

3.26 A friendly society may demutualise in any of the following ways.

•

The society may issue shares to its members where the shares entitle the members to a share of the profit or capital of the friendly society.

•

The society may distribute amounts to its members in their capacity as members (whether or not the amounts are paid from profits).

•

The society may amend its constitution to expressly provide for the distribution of profits to its members in their capacity as members.

Relief for members and insured entities of the friendly society

3.27 Most capital gains and capital losses arising under the friendly society's demutualisation to entities that are either members of the society or insured through the society or a wholly owned subsidiary of the society will be disregarded.

•

An exception to this rule applies when the member or insured entity receives an amount of money under the demutualisation. The consequences of this transaction are set out in paragraphs 3.35 to 3.41.

3.28 It will be a question of fact as to whether a specific transaction (and therefore a capital gain or capital loss) arises under the friendly society's demutualisation. Transactions are likely to vary between demutualising friendly societies. In determining whether a transaction arises under a friendly society's demutualisation, regard may be given to the friendly society's demutualisation scheme approved by its members.

3.29 However, transactions that occur after the distribution of the friendly society's accumulated mutual surplus will not be transactions that occur under the friendly society's demutualisation. This will be the case even if the transactions occur as part of a broader scheme for reorganising the friendly society's affairs. Nonetheless, a friendly society may distribute its accumulated mutual surplus in more than one transaction and in this case each of these transactions would occur under the friendly society's demutualisation. However, if a friendly society distributes its accumulated mutual surplus in the form of shares for example, then there will be cost base implications for the shares if they are not all issued at the same time. Further information about these cost base rules is set out in paragraph 3.49.

Example 3.4

Further to Example 3.3.

Following approval from its members, Benevolent Company demutualises to a not-for-profit entity on 27 October 2008 and distributes its accumulated mutual surplus to its members in the form of money.

Under the terms of Benevolent Company's demutualisation, the accumulated mutual surplus will be distributed as follows:

•

90 per cent of the total accumulated mutual surplus to be distributed will initially be distributed to members that have agreed to receive their share of the accumulated mutual surplus and the remaining 10 per cent will be retained for other members that may make a future claim for their share of the surplus.

•

After six months, the residual amount of the accumulated mutual surplus will then be distributed to all members that had previously received a share of the distributed accumulated mutual surplus (whether it was from the initial 90 per cent distribution or the remaining 10 per cent distribution).

The distribution of each of these amounts will be transactions that occur under Benevolent Company's demutualisation.

3.30 Entities that are insured through the friendly society or a wholly owned subsidiary (insured entities) may include, for example:

•

policyholders and other insured persons within the meaning of the PHIA 2007 - where the friendly society or a wholly owned subsidiary carries on a health insurance business; and

•

owners or holders of life insurance policies within the meaning of the ITAA 1997 - where the friendly society or a wholly owned subsidiary carries on a life insurance business. This may also include owners or holders of funeral policies, income bonds, sickness policies and scholarship plans within the meaning of the ITAA 1997.

[ Schedule 3, item 1, subparagraph 316-55(1 )( a )( ii )]

3.31 In some cases, depending on the terms of the friendly society's demutualisation, entities that were formerly members of the society or were formerly insured by the society or a wholly owned subsidiary may be entitled to receive a share of the society's accumulated mutual surplus.

•

For convenience, references to members or insured entities also include entities that were former members of the society or were formerly insured by the society or a wholly owned subsidiary.

Example 3.5

Further to Example 3.1.

Friendliest Friendly announces its intention to demutualise.

Mary is a member of Friendliest Friendly at the time of this announcement and at the time its members subsequently approve its demutualisation. Mary is entitled to receive an allocation of 1,500 shares in Friendliest Friendly under the terms of its demutualisation.

However, Mary is no longer a member at the time the Friendliest Friendly demutualises and issues her with 1,500 shares. Mary is therefore a former member of Friendliest Friendly.

3.32 If a member or insured entity dies during a demutualisation process, similar CGT relief may also be available for their successor (such as a legal personal representative (LPR)) and beneficiaries of their estate. Further information about the CGT consequences for the LPR and beneficiaries in these circumstances is set out in paragraphs 3.86 to 3.96.

Disregard capital gains and capital losses

3.33 Except when a member or insured entity of the friendly society receives an amount of money under its demutualisation, capital gains and capital losses arising to the entity will be disregarded from CGT events that happen under the society's demutualisation to an interest of the member or insured entity that is affected by demutualisation . [ Schedule 3, item 1, paragraph 316-55(1 )( a )]

3.34 An interest affected by demutualisation may include:

•

an interest that the entity has (or had) in the friendly society as the owner or holder of an insurance policy with the society or a wholly owned subsidiary that is a life insurer or health insurer;

•

a membership interest that the entity has (or had) in the friendly society;

•

a right or interest of another kind that the entity has (or had) in the friendly society; or

•

a right or interest of another kind that arises to the entity under the demutualisation.

-

However, an interest in a lost policy holders trust is excluded from being an ' interest affected by demutualisation' . Instead a separate regime exists for dealing with these interests. Further information about the lost policy holders trust regime is set out in paragraphs 3.66 to 3.85.

[ Schedule 3, item 1, paragraph 316-55(1 )( b )]

Example 3.6

Further to Examples 3.1 and 3.5.

Philip is a member of Friendliest Friendly and under the terms of its constitution has a number of rights including the right to receive notice of Friendliest Friendly's Annual General Meeting, the right to attend and be heard at that meeting and the right to require Friendliest Friendly to manage its assets in a certain way and to operate on a not-for-profit basis.

Under the terms of Friendliest Friendly's demutualisation scheme, Philip acquires the right to receive 5,000 shares.

These rights make up Philip's interests that are affected by Friendliest Friendly's demutualisation. These rights are satisfied when Friendliest Friendly distributes its accumulated mutual surplus and Philip receives his 5,000 shares.

As Philip did not receive an amount of money under Friendliest Friendly's demutualisation, he disregards any capital gains or capital losses that arise from the satisfaction of these rights.

Example 3.7

Further to Example 3.5.

Mary has the right to receive 1,500 shares under Friendliest Friendly's demutualisation. Mary subsequently receives these shares when Friendliest Friendly distributes its accumulated mutual surplus and so her right to receive the shares ends.

This right is an interest affected by Friendliest Friendly's demutualisation. As it arises under Friendliest Friendly's demutualisation Mary disregards any capital gains or capital losses arising to her from the satisfaction of her right to the 1,500 shares.

Capital gains and capital losses realised on an amount of money

3.35 From a policy perspective, a member or insured entity that receives an amount of money under their friendly society's demutualisation should receive a consistent CGT outcome relative to a member or insured entity that receives an allocation of shares. This can be achieved by ensuring that the CGT outcome for such a member or insured entity is equivalent to that for a member or insured entity that receives an allocation of shares and immediately disposes of them.

•

In this context it is important to note that Division 9AA of the ITAA 1936 and Division 315 of the ITAA 1997 do not distinguish between members and policyholders of the demutualising entity that have continuously held an interest in the demutualising entity since before 20 September 1985 and those that have not for the purposes of providing a modified cost base for issued shares.

3.36 A member or insured entity that receives an amount of money under their friendly society's demutualisation for the cancellation or variation of their interests affected by demutualisation does not disregard any capital gains or capital losses arising in relation to the receipt of money. [ Schedule 3, item 1, paragraphs 316-60(1 )( a ), ( b ), and ( d ), paragraph 316-60(3 )( a ) and subparagraph 316-60(1 )( c )( i )]

3.37 Instead the member or insured entity calculates whether they realise a capital gain or capital loss on the basis that their interest affected by demutualisation has a modified cost base or reduced cost base. [ Schedule 3, item 1, subsection 316-60(2 )]

3.38 The member or insured entity then works out the cost base or reduced cost base of their interest affected by the demutualisation by multiplying the capital proceeds they receive by the friendly society's valuation factor [ Schedule 3, item 1, paragraph 316-60(2 )( b )].

•

Further information about calculating the friendly society's valuation factor is set out in paragraphs 3.53 to 3.65.

•

The friendly society may inform its members or insured entities what its valuation factor is.

Example 3.8

Further to Examples 3.3 and 3.4.

David has been a continuous member of Benevolent Company since 2005 and under its demutualisation receives $2,000 in satisfaction of the rights he has against Benevolent Company. These rights are David's interests affected by Benevolent Company's demutualisation.

Benevolent Company has a valuation factor of 0.9.

•

Examples 3.14 and 3.15 provide information about how a friendly society may calculate its valuation factor .

David calculates whether he makes a capital gain or capital loss from the receipt of the $2,000 on the basis that his interests affected by demutualisation have a modified cost base or reduced cost base.

David calculates his cost base for these interests by multiplying the $2,000 capital proceeds he receives by Benevolent Company's valuation factor of 0.9.

David's interests affected by demutualisation have a cost base of $1,800.

•

This is calculated as follows:

-

$2,000 capital proceeds multiplied by a 0.9 valuation factor .

David therefore realises a capital gain of $200 on his interests.

•

This is calculated as follows:

-

$2,000 capital proceeds less a $1,800 cost base.

3.39 The following rules will ensure that members and insured entities that receive an amount of money under the demutualisation receive an equivalent CGT outcome to members and insured entities that receive shares.

•

A capital gain realised by a member or insured entity from the receipt of an amount of money under their friendly society's demutualisation will not be a ' discount capital gain' [ Schedule 3, item 15 ].

•

A capital gain or capital loss realised by a member or insured entity from the receipt of an amount of money under their friendly society's demutualisation will not be disregarded even where the member or insured entity has held their interest affected by demutualisation since before 20 September 1985 [ Schedule 3, item 1, paragraph 316-60(3 )( b )].

Members or insured entities that receive both non-monetary capital proceeds and money

3.40 A member or insured entity may receive their share of the friendly society's accumulated mutual surplus in the form of money and in the form of non-monetary proceeds, such as shares or rights to acquire shares.

3.41 In these situations the member or insured entity will realise a capital gain or capital loss only in relation to the capital proceeds received in the form of money. In calculating this capital gain or capital loss, the member or insured entity excludes the market value of any property other than money they receive under the demutualisation from their capital proceeds. [ Schedule 3, item 1, subsection 316-60(2 )]

Example 3.9

Further to Example 3.2.

Affable Society announces its intention to demutualise and offers its members the choice of receiving their share of its accumulated mutual surplus in the form of:

•

an amount of money;

•

shares in Healthy Health; or

•

a combination of money and shares in Healthy Health.

Niomi is a member of Affable Society and elects to receive 100 per cent of her share of the accumulated mutual surplus in the form of money. She subsequently receives $1,000 from Affable Society when it demutualises. This payment is made in satisfaction of a number of rights ( interests affected by demutualisation ) Niomi has against Affable Society.

Affable Society has a valuation factor of 0.85.

Niomi calculates whether she makes a capital gain or capital loss on the basis that these interests affected by demutualisation have a modified cost base or reduced cost base.

Niomi calculates her cost base by multiplying the $1,000 capital proceeds she receives by Affable Society's valuation factor of 0.85.

Niomi's interests affected by demutualisation have a cost base of $850.

•

This is calculated as follows:

-

$1,000 capital proceeds multiplied by a 0.85 valuation factor .

Niomi realises a capital gain of $150.

•

This is calculated as follows:

-

$1,000 capital proceeds less a $850 cost base.

Example 3.10

Further to Examples 3.2 and 3.9.

Rob is also a member of Affable Society and elects to receive 50 per cent of his share of the accumulated mutual surplus in the form of money and 50 per cent in the form of shares in Healthy Health. He subsequently receives $500 from Affable Society and 250 shares in Healthy Health (each worth $2) when Affable Society demutualises.

Rob calculates whether he makes a capital gain or capital loss from this transaction on the basis that his interests affected by demutualisation have a modified cost base or reduced cost base.

Rob calculates his cost base by multiplying the $500 capital proceeds (excluding the market value of the 250 shares he receives in Healthy Health) he receives by Affable Society's valuation factor of 0.85.

Rob's interests affected by demutualisation have a cost base of $425.

•

This is calculated as follows:

-

$500 capital proceeds multiplied by a 0.85 valuation factor.

Rob realises a capital gain of $75.

•

This is calculated as follows:

-

$500 capital proceeds less a $425 cost base.

Example 3.13 explains how Rob calculates the cost base of his shares in Healthy Health.

Relief for the demutualising friendly society

3.42 Capital gains or capital losses that arise to the friendly society under its demutualisation will be disregarded. [ Schedule 3, item 1, section 316-75 ]

Relief for other entities

3.43 Capital gains or capital losses that arise under the friendly society's demutualisation to other entities will be disregarded when the following three requirements are satisfied. [ Schedule 3, item 1, section 316-80 ]

3.44 First, the entity must be established solely for the purpose of participating in the friendly society's demutualisation. It will be a question of fact whether an entity meets this requirement. However, in determining this, regard should be given to the terms of the friendly society's demutualisation and whether, for example, its demutualisation scheme provides for the creation of the entity. [ Schedule 3, item 1, paragraph 316-80(a )]

3.45 Second, the entity must not be a lost policy holders trust. [ Schedule 3, item 1, paragraph 316-80(a )]

•

These amendments create a separate framework for a lost policy holders trust. This framework is described in paragraphs 3.66 to 3.85.

3.46 Third, the capital gains or capital losses realised by the entity must be connected to the allocation or distribution of the friendly society's accumulated mutual surplus and arise either prior to, or at the time, the surplus is allocated or distributed. Similar to the first requirement, it will be a question of fact whether these requirements are satisfied. [ Schedule 3, item 1, paragraph 316-80(b )]

Shares and rights issued to members and insured entities under the demutualisation

3.47 As noted above, a friendly society may distribute its accumulated mutual surplus in the form of shares in the demutualised friendly society or another company or in the form of rights to acquire such shares.

•

These rights to acquire shares are separate to the rights that make up a member's or insured entity's interest affected by demutualisation and which end or are satisfied under the demutualisation.

Acquisition time of shares or rights to acquire shares

3.48 Members and insured entities that receive shares or rights to acquire shares under their friendly society's demutualisation will be taken, for CGT purposes, to have acquired each of the shares or rights at their issue time. [ Schedule 3, item 1, subsection 316-105(3 )]

Example 3.11

Further to Examples 3.6 and 3.7.

Friendliest Friendly demutualises and issues shares to its members, including Philip and Mary, on 7 November 2008.

Philip is taken to have acquired each of the 5,000 shares issued to him on 7 November 2008. Similarly, Mary is taken to have acquired each of the 1,500 shares issued to her on 7 November 2008.

Cost base of shares or rights to acquire shares

3.49 Members and insured entities of the friendly society that receive shares or rights to acquire shares under the society's demutualisation will receive a modified cost base for those shares or rights when the following requirements are satisfied [ Schedule 3, item 1, subsections 316-105(1 ) and 316-115(1 )].

•

First, the shares or rights must be issued under the demutualisation and in connection with the member or insured entity's interest affected by demutualisation being varied or cancelled [ Schedule 3, item 1, paragraphs 316-110(1 )( b ) and 316-110(1 )( c )].

•

Second, the shares or rights must be issued simultaneously to:

-

all members and insured entities that are entitled to receive shares and rights to acquire shares under the demutualisation;

-

all successors that are entitled to receive shares or rights because of the death of a member or insured entity; and

-

the trustee of a lost policy holders trust.

[ Schedule 3, item 1, subsection 316-110(3 ) and section 316-115 ]

•

Third, if shares are issued, the shares must be issued in the demutualised friendly society or in a company that wholly owns the demutualised friendly society [ Schedule 3, item 1, subparagraphs 316-110(1 )( a )( i ) and ( iii )].

•

Alternatively, if rights to acquire shares are issued, then the rights must allow only for shares in the demutualised friendly society or a company that wholly owns the friendly society to be acquired [ Schedule 3, item 1, subparagraphs 316-110(1 )( a )( ii ) and ( iv )].

-

In addition, the rights must have an exercise price of nil [ Schedule 3, item 1, subsection 316-110(2 )].

3.50 The first element of the cost base or reduced cost base of each of these shares or rights to acquire shares is calculated by multiplying the market value of the share or right at the time it is issued by the friendly society's valuation factor [ Schedule 3, item 1, subsections 316-105(1 ) and ( 2 )].

•

Further information about calculating the friendly society's valuation factor is set out in paragraphs 3.53 to 3.65.

Example 3.12

Further to Example 3.11.

Each of the shares issued in Friendliest Friendly has a market value of $3.00 at the time of their issue.

Friendliest Friendly has a valuation factor of 0.95.

The first element of the cost base or reduced cost base of each of the 5,000 shares in Friendliest Friendly issued to Philip is $2.85.

•

This is calculated as follows:

-

$3.00 market value multiplied by a 0.95 valuation factor .

Mary calculates the first element of the cost base or reduced cost base of each of the 1,500 shares issued to her similarly.

Example 3.13

Further to Example 3.10.

The first element of the cost base or reduced cost base of each of the 250 shares in Healthy Health issued to Rob is $1.70.

•

This is calculated as follows:

-

$2.00 market value multiplied by a 0.85 valuation factor .

Should Rob immediately sell his shares he would realise a capital gain of $0.30 per share, assuming he incurs no other costs in relation to the shares.

•

This is calculated as follows:

-

$2.00 capital proceeds (current market value of each of the shares) less a $1.70 cost base (as calculated above).

Rob's total capital gain from the 250 shares is $75.

•

This is calculated as follows:

-

$0.30 capital gain per share multiplied by 250 shares.

3.51 The first element of the cost base or reduced cost base of shares or rights to acquire shares that are issued to the trustee of a lost policy holders trust is also calculated in the same way [ Schedule 3, item 1, subsection 316-115(3 )].

•

Further information about a lost policy holders trust is set out in paragraphs 3.66 to 3.85.

3.52 The first element of the cost base or reduced cost base of shares or rights to acquire shares that are issued to the LPR of a deceased member or insured entity is also calculated in the same way [ Schedule 3, item 1, subsection 316-115(2 )].

•

Further information about other CGT consequences of shares or rights to acquire shares issued to a deceased member or insured entity's LPR is set out in paragraphs 3.86 to 3.96.

Friendly society's valuation factor

3.53 The friendly society's valuation factor is derived as follows:

[[Market value of the friendly society's health insurance business (if any) + embedded value of the friendly society's other business] / Total capital proceeds received under the demutualisation by members, insured entities, successors to deceased members and insured entities and the trustee of the lost policy holders trust to interests affected by demutualisation (expect those interests that arise under the demutualisation]

[ Schedule 3, item 1, subsection 316-65(1 )]

3.54 The formula's numerator represents the value of the friendly society and the denominator represents the friendly society's accumulated mutual surplus.

•

The two components that make up the formula's numerator reflect the differing treatment of life insurers and private health insurers under the existing income tax law. Division 9AA of the ITAA 1936 and Division 315 of the ITAA 1997 respectively calculate the cost base of shares issued to members and policyholders of life insurers and policyholders of private health insurers.

•

The formula's denominator reflects the total value of the friendly society's accumulated mutual surplus distributed to:

-

members and insured entities of the society;

-

successors of deceased members and insured entities; and

-

the trustee of a lost policy holders trust.

[ Schedule 3, item 1, section 316-65 ]

3.55 Each of the components of the valuation formula is discussed in further detail below.

Market value of any health insurance business

3.56 In calculating the market value of a health insurance business carried on by the friendly society (either directly or through a wholly owned subsidiary) regard may be given to the consideration paid to the society or a subsidiary of the society for the disposal or control of that business. [ Schedule 3, item 1, subsection 316-65(1 )]

3.57 If such consideration is paid to the friendly society or a subsidiary of the society and the amount to be paid is fixed under the terms of a binding agreement then the market value of the health insurance business may be calculated by reference to the time that the binding agreement for the disposal or control of the business is made and the value of the consideration.

3.58 Alternatively, if the consideration paid to the friendly society or a subsidiary of the society is dependent on subsequent events occurring after a binding bid is made, then the market value of the health insurance business may be calculated by reference to the time that the payment is made and the value of the consideration.

Example 3.14

Further to Example 3.2.

Healthy Health entered into a binding agreement with Affable Society as part of a broader arrangement to pay Affable Society $50 million for control of Affable Society's private health insurance.

Several months later Healthy Health makes this $50 million payment to Affable Society after its members agree to its demutualisation. At the time Healthy Health makes this payment, the market value of Affable Society and its private health insurance business has slightly declined.

For the purposes of the valuation factor calculation, Affable Society's private health insurance business has a market value of $50 million.

Embedded value of any other businesses

3.59 The embedded value of the friendly society's other business is calculated on the assumption that the friendly society or a wholly owned subsidiary does not carry on a health insurance business. [ Schedule 3, item 1, subsection 316-65(1 )]

3.60 The embedded value is derived from the sum of the friendly society's existing business value and its adjusted net worth . These amounts need to be calculated on either:

•

the demutualisation resolution day - if an accounting period of the friendly society ends on that day [ Schedule 3, item 1, subsection 316-70(1 ) and paragraph 316-70(3 )( a )]; or

•

the last day of the most recent accounting period of the friendly society prior to the demutualisation resolution day [ Schedule 3, item 1, subsection 316-70(1 ) and paragraph 316-70(3 )( b )].

-

However, if the embedded value is calculated on the last day of the friendly society's most recent accounting period prior to the demutualisation resolution day, the friendly society's existing business value and adjusted net worth need to be adjusted to take account of any significant changes to these amounts up until the demutualisation resolution day [ Schedule 3, item 1, subsection 316-70(5 )].

In this context, the reference to a friendly society's accounting period refers to its financial year accounting period rather than any other accounting period that the friendly society may have for management reporting purposes.

3.61 Consistent with Division 9AA of the ITAA 1936, the friendly society's demutualisation resolution day is either the day:

•

on which the resolution to proceed with the demutualisation is passed by the society's members or insured entities; or

•

if the friendly society, or a subsidiary of the friendly society, has a life insurance business and all of that business is transferred to another company under the demutualisation under a scheme confirmed by the Federal Court of Australia - the day that the transfer takes place.

-

However, if the transfer takes place over more than one day, then the last day that the transfer takes place will be the friendly society's demutualisation resolution day.

[ Schedule 3, item 1, subsection 316-70(4 )]

3.62 The embedded value calculation needs to be calculated according to Australian actuarial practice by an actuary who:

•

is a Fellow or Accredited Member of the Institute of Actuaries of Australia; and

•

is not an employee of the friendly society, a subsidiary of the society that carries on a life insurance or health insurance business or an entity that wholly acquires the friendly society under the demutualisation [ Schedule 3, item 1, subsection 316-70(2 ).

3.63 There are also two assumptions that need to be made in calculating the friendly society's existing business value and adjusted net worth . These are:

•

that the friendly society and any subsidiaries with a life insurance or health insurance business will continue to conduct their businesses in the same way as previously conducted as if the demutualisation did not occur ( the continued business assumption ) [ Schedule 3, item 1, subsection 316-70(6 )]; and

•

that the friendly society and any subsidiaries will incur the same amount and type of expenditure (adjusted for inflation) as incurred prior to the demutualisation ( the expenditure assumption ) [ Schedule 3, item 1, subsection 316-70(7 )].

Total capital proceeds

3.64 Capital proceeds received by members, insured entities, successors of deceased members and insured entities and the trustee of the lost policy holders trust under the demutualisation in satisfaction of rights or interests that arise under the demutualisation are excluded from the valuation factor's denominator. This ensures that only capital proceeds received under the demutualisation in relation to the existing rights and interests of members or insured entities to participate mutually in the friendly society are included in the denominator.

•

Including any capital proceeds for rights or interests that arise under the demutualisation may lead to a double counting of some capital proceeds. This will arise for example, if some of the capital proceeds received in relation to a member's or insured entity's rights to participate mutually in the friendly society are rights that arise under the demutualisation. In this case, the value of the right that arises under the demutualisation is included in the capital proceeds the member or insured entity receives from their rights to participate mutually, and so should not be included again.

[ Schedule 3, item 1, subsection 316-65(1 )]

3.65 Any reduction to the capital proceeds a member, insured entity or a successor of a deceased member or insured entity makes because they receive both money and non-monetary capital proceeds under the demutualisation is ignored when calculating the total capital proceeds received for the purposes of the valuation formula. This ensures that the value of all capital proceeds received under the demutualisation is included in the valuation factor's denominator whether the proceeds take the form of assets or an amount of money. [ Schedule 3, item 1, subsection 316-65(2 )]

Example 3.15

Further to Examples 3.13 and 3.14.

Under Affable Society's demutualisation, $70 million is distributed to its members (and their successors) and 15 million shares in Healthy Health (each worth $2) are issued to its members, their successors and the trustee of the Affable Lost Trust (a lost policy holders trust).

The total capital proceeds received by these entities is $100 million.

•

This is calculated as follows:

-

$70 million in cash plus $30 million (15 million shares each with a market value of $2).

The embedded value of Affable Society's non-health insurance business is $35 million.

Affable Society has a valuation factor of 0.85.

•

This is calculated as follows:

-

The numerator of Affable Society's valuation factor is $85 million. This comprises of a $50 million market value of Affable Society's private health insurance business plus a $35 million embedded value of its other business.

-

The denominator of the valuation factor is equal to $100 million.

-

That is, (($50 million + $35 million) / $100 million)

Lost policy holders trust

3.66 Division 315 of the ITAA 1997 provides a legislative framework for shares or rights to acquire shares to be held on trust for policyholders of demutualising health insurers that are entitled to receive the shares or rights but do not receive them directly. The framework allows these shares or rights to be held on trust and transferred to the policyholder without CGT consequences for the trustee. The framework also ensures that the policyholder receives the shares or rights with the same CGT attributes as if they had received the shares or rights to acquire shares directly.

3.67 These amendments provide a similar framework for shares or rights to acquire shares to be held on trust and then transferred to members and insured entities of a demutualising friendly society. As these amendments provide a different CGT outcome for distributions of money compared to Division 315 of the ITAA 1997, this framework also facilitates payments of money from the lost policy holders trust to members and insured entities.

•

These members and insured entities (referred to as beneficiaries of the lost policy holders trust) could include unverified or overseas members or unverified or overseas insured entities. A beneficiary of the lost policy holders trust could also include an LPR or beneficiary in the estate of a deceased member or insured entity that was a beneficiary of the lost policy holders trust. [ Schedule 3, item 1, subsection 316-155(4 )]

Requirements for these rules to apply

3.68 These rules will only apply when the following conditions are satisfied:

•

the friendly society's demutualisation scheme that is approved by a court provides for the lost policy holders trust [ Schedule 3, item 1, subsections 316-155(1 ) and ( 2 )];

•

the trust exists solely for the purpose of holding shares or rights to acquire shares on behalf of entities that are beneficiaries of the trust; or holding money payable in satisfaction of the variation or cancellation of interests affected by demutualisation [ Schedule 3, item 1, subsection 316-155(3 )]; and

•

shares or rights to acquire shares are issued or money is paid to the trustee of the lost policy holders trust under the friendly society's demutualisation [ Schedule 3, item 1, subsection 316-155(5 )].

Example 3.16

Further to Examples 3.1 and 3.11.

After its members agreed to the demutualisation, Friendliest Friendly's demutualisation scheme was subsequently approved by a court. This scheme provided for a trust, Friendly Trust, which has the sole purpose of holding shares on behalf of unverified members and members registered at an overseas address. Friendly Trust's deed provides that the Trust will cease after three years.

Under Friendliest Friendly's demutualisation, the trustee of Friendly Trust receives 50,000 shares in Friendliest Friendly.

The lost policy holder trust rules would apply to Friendly Trust.

Trustee of the lost policy holders trust

Acquisition time of shares or rights to acquire shares

3.69 The trustee of the lost policy holders trust that receives shares or rights to acquire shares will be taken, for CGT purposes, to have acquired the shares or rights at their issue time. [ Schedule 3, item 1, subsections 316-105(3 ) and 316-115(3 )]

Cost base of shares or rights to acquire shares

3.70 The first element of the cost base or reduced cost base of the shares or rights issued to the trustee of the lost policy holders trust under the friendly society's demutualisation is calculated in the same way as if the shares or rights to acquire shares had been issued to the member or insured entity (or their LPR or beneficiary of their estate if the member or insured entity dies before receiving the shares or rights) directly. [ Schedule 3, item 1, subsections 316-105(1 ) and ( 2 ) and 316-115(3 )]

•

These rules are set out in paragraphs 3.49 to 3.52.

Example 3.17

Further to Examples 3.12 and 3.16.

The trustee of Friendly Trust acquires 50,000 shares in Friendliest Friendly on 7 November 2008. The first element of the cost base of each of these shares is $2.85.

Transfer of assets to a beneficiary of the lost policy holders trust

3.71 Any capital gains or capital losses arising to the trustee of the lost policy holders trust from the transfer of assets in the lost policy holders trust to a beneficiary of the trust will be disregarded. Similarly, any capital gains or capital losses arising to the trustee from a beneficiary of the lost policy holders trust becoming absolutely entitled to an asset of the trust will be disregarded. [ Schedule 3, item 1, subsections 316-170(1 ) and ( 2 )]

Example 3.18

Further to Example 3.17.

Jess was a member of Friendliest Friendly and under its demutualisation was entitled to receive 500 shares. However, Jess was unaware of Friendliest Friendly's demutualisation and her entitlement to the shares. Six months after Friendliest Friendly demutualised Jess became aware of her entitlement to the 500 shares and contacted the trustee of Friendly Trust. At this time, each of the shares in Friendliest Friendly has a market value of $3.50.

Any capital gains arising to the trustee of Friendly Trust from Jess becoming absolutely entitled to the 500 shares are disregarded.

Example 3.19

Further to Example 3.17.

Ross was also a member of Friendliest Friendly and, although he was unaware of it, he was entitled to receive 1,000 shares under its demutualisation.

Twelve months after demutualising Friendliest Friendly reorganises its affairs and interposes a holding company, Friendly Holding Ltd (Friendly Holding) between itself and its shareholders. Under this scheme, shareholders in Friendliest Friendly exchange two shares in Friendliest Friendly for one share in Friendly Holding. The trustee of Friendly Trust subsequently receives shares in Friendly Holding and, assuming the requirements of Subdivision 124-G of the ITAA 1997 are satisfied, a roll-over of any CGT liability that would have otherwise arisen under the exchange.

Three months later (15 months after Friendliest Friendly demutualised) Ross realised he had an entitlement to shares under Friendliest Friendly's demutualisation and contacted the trustee of Friendly Trust. At this time, each of the shares in Friendly Holding has a market value of $7.50.

Any capital gains arising to the trustee from Ross becoming absolutely entitled to 500 shares in Friendly Holding are disregarded.

3.72 The lost policy holders trust may also provide for the trustee to dispose of shares or rights in the trust held on behalf of a beneficiary and give the net proceeds to the beneficiary, on whose behalf the trustee was holding the assets. This will typically occur when the beneficiary is registered at an overseas address.

Example 3.20

Further to Example 3.17.

Eric was a member of Friendliest Friendly and was entitled to receive 1,000 shares under its demutualisation. Although Eric remains an Australian resident for tax purposes, he was registered with Friendliest Friendly with an overseas address. Instead of directly receiving his 1,000 shares when Friendliest Friendly demutualised, Eric's shares are issued to the trustee of Friendly Trust to sell on his behalf. Two months after Friendliest Friendly demutualises, the trustee of Friendly Trust sells the 1,000 shares for $3.20 each.

Any capital gains arising to the trustee from this transaction are disregarded.

Other dealings with assets

3.73 Any capital gains arising from the trustee dealing with the assets in the lost policy holders trust in any other way will, broadly, be assessed to the trustee under section 99A of the ITAA 1936. [ Schedule 3, item 1, section 316-175 ]

3.74 Specifically, for the purposes of section 97, 98A and 100 of the ITAA 1936, the share of the net income of the trust that is attributable to the capital gains arising from these transactions will not be included in the income of any beneficiaries of the trust [ Schedule 3, item 1, subsection 316-175(2 )]. In addition, the trustee will not be assessed on this share of net income under section 98 of the ITAA 1936 [ Schedule 3, item 1, subsection 316-175(3 )]

Beneficiaries of the lost policy holders trust that receive assets or money from the trust

Beneficiaries that receive assets

3.75 Any capital gains or capital losses arising to a beneficiary receiving assets from the lost policy holders trust in satisfaction of their interest in the trust are disregarded. [ Schedule 3, item 1, section 316-160 ]

3.76 The beneficiary will be taken to have acquired each of the assets at the same time as the trustee of the lost policy holders trust acquired them. [ Schedule 3, item 1, subsections 316-170(1 ) and ( 4 )]

3.77 The first element of the cost base or reduced cost base of each of the assets that are transferred to a beneficiary from the lost policy holders trust will be equal to the asset's cost base in the trustee's hands. [ Schedule 3, item 1, subsections 316-170(1 ) and ( 3 )]

3.78 The trustee of the lost policy holders may inform the beneficiary what the first element of the cost base or reduced cost base of any transferred asset will be in the beneficiary's hands. The trustee may also advise the beneficiary of the date that the trustee originally acquired the asset as this date will be the same date that the beneficiary will be taken to have acquired the asset for CGT purposes.

Example 3.21

Further to Example 3.18.

Jess becomes absolutely entitled to 500 shares, which are held in Friendly Trust, in Friendliest Friendly six months after it demutualises. Jess becomes absolutely entitled to the shares in satisfaction of her interest in Friendly Trust.

Any capital gains or capital losses arising to Jess from this transaction are disregarded.

The first element of the cost base or reduced cost base of each of these shares in Jess's hands is $2.85. Jess will be taken to have acquired each of these shares on 7 November 2008.

Example 3.22

Further to Example 3.19.

Ross becomes absolutely entitled to 500 shares in Friendly Holding held in Friendly Trust in satisfaction of his interest in Friendly Trust.

Any capital gains or capital losses arising to Ross from this transaction are disregarded.

The first element of the cost base or reduced cost base of each of these shares in Ross's hands is $5.70. Ross will be taken to have acquired each of these shares on 7 November 2008.

•

Ross receives this cost base because the trustee exchanged shares in Friendliest Friendly for shares in Friendly Holding and received a roll-over under Subdivision 124-G of the ITAA 1997.

Example 3.23

Further to Example 3.20.

Eric becomes absolutely entitled to 1,000 shares in Friendliest Friendly in satisfaction of his interest in Friendly Trust. Any capital gains or capital losses arising to Eric from this transaction are disregarded

The first element of the cost base of each of these shares is $2.85.

The trustee of Friendly Trust then sells the shares on behalf of Eric for $3.20. Assuming no other costs are incurred, Eric realises a capital gain of $0.35 on each share sold.

•

This is calculated as follows:

-

$3.20 capital proceeds less a $2.85 cost base equals a $0.35 capital gain.

Beneficiaries that receive an amount of money

3.79 A beneficiary whose interest in the lost policy holders trust is satisfied from the receipt of money does not disregard any capital gains or capital losses arising from that receipt. [ Schedule 3, item 1, subsections 316-165(1 ) and ( 3 )]

3.80 Instead the beneficiary calculates whether they realise a capital gain or capital loss on the basis that their interest in the lost policy holders trust has a modified cost base or reduced cost base. [ Schedule 3, item 1, subsection 316-165(2 )]

3.81 The beneficiary works out the cost base or reduced cost base of their interest in the lost policy holders trust by multiplying the capital proceeds they receive from the trust by the friendly society's valuation factor [ Schedule 3, item 1, paragraph 316-165(2 )( b )].

•

Further information about calculating the friendly society's valuation factor is set out in paragraphs 3.53 to 3.65.

3.82 The trustee of the lost policy holders trust may inform the beneficiary what the friendly society's valuation factor is.

Beneficiaries that receive assets and an amount of money

3.83 A beneficiary's interest in the lost policy holders trust may be satisfied from the receipt of money and non-monetary proceeds.

3.84 In these situations the beneficiary will realise a capital gain or capital loss only in relation to the capital proceeds received in the form of money. In calculating this capital gain or capital loss, the member or insured entity excludes the market value of any property other than money they receive from their capital proceeds. [ Schedule 3, item 1, paragraph 316-165(2 )( a )]

Expiry of a beneficiary's interest in the lost policy holders trust

3.85 Capital gains or capital losses arising from the expiry of a beneficiary's interest in the lost policy holders trust are disregarded. [ Schedule 3, item 1, section 316-160 ]

Example 3.24

Further to Example 3.17.

Brendan was a member of Friendliest Friendly and under its demutualisation was entitled to receive 2,000 shares. However, Brendan was unaware of the demutualisation and his entitlement to shares.

Brendan is still unaware of his entitlement to shares three years later when Friendly Trust is wound up and his interest in the trust expires.

Any capital gains or capital losses arising to Brendan from the expiry of his interest in Friendly Trust are disregarded.

Shares, rights to acquire shares or money paid to an LPR

3.86 If a friendly society distributes its accumulated mutual surplus in the form of shares or rights to acquire shares and a member or insured entity of the friendly society dies during the demutualisation before receiving their shares or rights, those shares or rights will typically be issued to their LPR. The LPR can then pass the shares or rights to acquire shares to a beneficiary of the deceased member or insured entity's estate.

3.87 Similarly if a friendly society distributes its accumulated mutual surplus in the form of money and a member or insured entity of the friendly society dies during the demutualisation before receiving the money, then the money will typically be paid to their LPR.

Disregard capital gains and capital losses

3.88 Except where the LPR receives an amount of money under the friendly society's demutualisation, capital gains or capital losses arising to the LPR will be disregarded from CGT events that happen under the demutualisation to an interest of the deceased member or insured entity that is affected by demutualisation . [ Schedule 3, item 1, subsection 316-55(2 )]

Capital gains and capital losses realised on an amount of money

3.89 An LPR that receives an amount of money under a friendly society's demutualisation in relation to a deceased member or insured entity's interest affected by demutualisation does not disregard any capital gains or capital losses arising in relation to the receipt of money. [ Schedule 3, item 1, paragraphs 316-60(1 )( a ), ( b ) and ( d ) and subparagraph 316-60(c )( ii )]

3.90 Instead the LPR calculates whether they realise a capital gain or capital loss on the basis that the deceased member or insured entity's interests affected by demutualisation have a modified cost base or reduced cost base. The LPR works out the cost base or reduced cost base of the deceased member or insured entity's interest affected by demutualisation by multiplying the capital proceeds they receive by the friendly society's valuation factor . [ Schedule 3, item 1, paragraph 316-60(2 )( b )]

LPRs that receive both non-monetary capital proceeds and money

3.91 Where an LPR receives non-monetary proceeds and money, the LPR will realise a capital gain or capital loss only in relation to the capital proceeds received in the form of money. In calculating this capital gain or capital loss, the LPR excludes the market value of any property other than money they receive from their capital proceeds. [ Schedule 3, item 1, subsection 316-60(2 )]

Shares or rights to acquire shares issued to an LPR

Consequences for the LPR

3.92 An LPR that receives shares or rights to acquire shares under the demutualisation will receive the same first element of the cost base or reduced cost base that the deceased member or insured entity would have received. [ Schedule 3, item 1, subsections 316-115(2 ) and 316-200(1 )]

Example 3.25

Further to Examples 3.11 and 3.12.

Hamish was a member of Friendliest Friendly society at the time it announced its intention to demutualise and at the time its members approved the demutualisation. Under Friendliest Friendly's demutualisation Hamish was entitled to receive 3,000 shares in satisfaction of the rights he had against Friendliest Friendly. Unfortunately, Hamish died two days before Friendliest Friendly's demutualisation and so the 3,000 shares were issued to Darren, his LPR.

Any capital gains or capital losses arising to Darren from receiving the 3,000 shares in Friendliest Friendly are disregarded.

The first element of the cost base of each of the 3,000 shares issued to Darren is $2.85. This is the same first element of the cost base that Hamish would have received for the shares had he remained alive.

3.93 Any capital gain or capital loss arising to the LPR from each of the shares or rights passing to a beneficiary of the deceased member or insured entity's estate will be disregarded. [ Schedule 3, item 1, subsection 316-200(2 )]

Example 3.26

Further to Example 3.25.

Five months after Hamish's death, Darren transfers the 3,000 shares to Shaun, Hamish's beneficiary. Each of the shares has a market value of $3.45 at the time of the transfer.

Any capital gains arising to Darren from the transfer of the 3,000 shares in Friendliest Friendly to Shaun are disregarded.

Consequences for the beneficiary

3.94 A beneficiary of the deceased member or insured entity's estate that receives these shares or rights will be taken for CGT purposes to have acquired each of the shares or rights at the same time as the LPR acquired them. [ Schedule 3, item 1, subsection 316-200(4 )]

3.95 The first element of the cost base or reduced cost base of each of the shares or rights that pass to a beneficiary of the deceased member or insured entity's estate will be equal to the share or right's cost base in the hands of the LPR. [ Schedule 3, item 1, subsection 316-200(3 )]

Example 3.27

Further to Example 3.26.

Shaun receives the 3,000 shares in Friendliest Friendly. For CGT purposes Shaun is taken to have acquired each of the shares at the time they were issued to Darren (7 November 2008) rather than at the time he receives the shares from Darren.

Assuming Darren incurred no additional costs from the shares being transferred to Shaun, the first element of the cost base of each of the shares that Darren receives is $2.85.

Interest in a lost policy holders trust

Consequences for the LPR

3.96 Any capital gain or capital loss arising to the LPR from an interest in a lost policy holders trust passing to a beneficiary of the deceased member's or insured entity's estate will be disregarded. [ Schedule 3, item 1, section 316-205 ]

Non-CGT consequences of the demutualisation

General taxation consequences

3.97 A member or insured entity that receives shares or rights to acquire shares under their friendly society's demutualisation will not need to include any amount in their assessable income as a result of receiving these shares or rights [ Schedule 3, item 1, paragraphs 316-255(1 )( a ), ( 2 )( a ) and ( 2 )( b )]. Alternatively, a member or insured entity that receives an amount of money under their friendly society's demutualisation will not need to include the amount of that money in their assessable income provided it is received in connection with the variation or cancellation of their interest affected by demutualisation [ Schedule 3, item 1, paragraphs 316-255(1 )( b ), ( 2 )( a ) and(2 )( b )].

Example 3.28

Further to Example 3.8.

Apart from the $200 capital gain he realises, David does not need to include the $2,000 he receives under Benevolent Company's demutualisation in his assessable income.

3.98 Similarly, if an entity receives shares or rights to acquire shares because of the death of a member or insured entity of the friendly society, then that entity will not need to include an amount in their assessable income as a result of receiving these shares or rights to acquire shares [ Schedule 3, item 1, paragraphs 316-255(1 )( a ) and ( 2 )( c )]. Alternatively, an entity that receives an amount of money because of the death of a member or insured entity of the friendly society will not need to include the amount of money in their assessable income provided it is received in connection with the variation or cancellation of the deceased member or insured entity's interest affected by demutualisation [ Schedule 3, item 1, paragraphs 316-255(1 )( b ) and ( 2 )( c )].

3.99 A beneficiary of a lost policy holders trust that receives shares or rights to acquire shares from the lost policy holders trust will not need to include an amount in their assessable income as a result of receiving these shares or rights [ Schedule 3, item 1, paragraphs 316-255(1 )( c ) and ( 2 )( d )]. Alternatively, a beneficiary that receives an amount of money from a lost policy holders trust will not need to include the amount of that money in their assessable income provided it is received in connection with the variation or cancellation of an interest affected by demutualisation [ Schedule 3, item 1, paragraphs 316-255(1 )( d ) and ( 2 )( d )].

Franking debits and credits

3.100 If the friendly society or a wholly owned subsidiary has a franking account and that account is in surplus prior to the 'demutualisation resolution day', then a franking debit equal to the value of the surplus arises at the start of the demutualisation resolution day. [ Schedule 3, item 1, section 316-260 ]

•

This has the effect of reducing the franking account to zero and is broadly consistent with the treatment in Division 9AA of the ITAA 1936.

3.101 The friendly society's demutualisation resolution day is discussed in paragraph 3.61.

3.102 If a franking credit arises in the friendly society or a wholly owned subsidiary's franking account because of a distribution declared prior to the friendly society's demutualisation resolution day, a franking debit equal to the amount of the credit arises in the franking account at the same time as the credit arises. [ Schedule 3, item 1, section 316-265 ]

3.103 A franking credit may arise in the friendly society or a wholly owned subsidiary's franking account on or after the society's demutualisation resolution day if the society or subsidiary paid a pay as you go instalment or income tax on or after that day that is attributable to the period before that day. In these situations, a franking debit equal to the amount of the credit will arise in the franking account at the same time as the credit arises. [ Schedule 3, item 1, section 316-270 ]

3.104 Alternatively, a franking debit may arise in the friendly society or a wholly owned subsidiary's franking account on or after the society's demutualisation resolution day if the society or subsidiary received a refund of income tax that is attributable to the period before that day. In these situations, a franking credit equal to the amount of the debit will arise in the franking account at the same time as the debit arises. [ Schedule 3, item 1, section 316-275 ]

Exception to the share tainting rules

3.105 The share capital account of the friendly society or a company that owns all the shares in the friendly society will not become tainted if an amount is transferred to the account in connection with the friendly society's demutualisation.

•

This is consistent with demutualisations that occur under Division 9AA of the ITAA 1936 and Division 315 of the ITAA 1997, to which sections 197-35 and 197-37 of the ITAA 1997 apply respectively.

[ Schedule 3, item 19, subsection 197-38(1 )]

3.106 This exclusion will only apply to so much of the transferred amount that, together with any amounts that were previously transferred in connection with the demutualisation, does not exceed the sum of the cost bases of shares in the company that are issued to members, insured entities, successors of a deceased member or insured entity or the trustee of a lost policy holders trust. [ Schedule 3, item 19, subsections 197-38(2 ) and ( 3 )]

Application and transitional provisions

3.107 These amendments will apply to demutualisations that occur on or after 1 July 2008. This will ensure that friendly societies that demutualise on or after this date but prior to the amendments receiving Royal Assent may qualify for this relief. [ Schedule 3, items 4, 23 and 24 ]

Consequential amendments

3.108 Consequential amendments will be made to exclude friendly societies with a life and/or health insurance business from the demutualisation relief in Division 9AA of the ITAA 1936 and in Schedule 2H to the ITAA 1936. [ Schedule 3, items 2 and 3 ]

3.109 A consequential amendment will be made to section 11-55 of the ITAA 1997 to direct readers to the non-assessable non-exempt income provisions contained in these amendments. [ Schedule 3, item 5 ]

3.110 A consequential amendment will be made to the table in section 102-30 of the ITAA 1997 that sets out special rules that affect capital gains and capital losses. [ Schedule 3, item 6 ]

3.111 Consequential amendments will be made to the guide material in Subdivision 109-B of the ITAA 1997 to direct readers to the modified acquisition rules contained in these amendments. [ Schedule 3, items 7 to 10 ]

3.112 Consequential amendments will also be made to the guide material in Subdivision 112-B of the ITAA 1997 to direct readers to the modified cost base rules contained in these amendments. [ Schedule 3, items 11 to 14 ]

3.113 A consequential amendment will be made to Note 3 in section 118-1 of the ITAA 1997 to direct readers to the CGT exemptions contained in these amendments. [ Schedule 3, item 16 ]

3.114 A consequential amendment will be made to the anti-overlap rule in subsection 118-20(4) of the ITAA 1997 to ensure that a member or insured entity continues to realise a capital gain or capital loss when they receive an amount of money under the demutualisation that would otherwise be treated as not assessable and not exempt income. [ Schedule 3, item 17 ]

3.115 A consequential amendment will be made to exclude Subdivision 126-E of the ITAA 1997 from applying in relation to a demutualisation that Division 316 applies to. [ Schedule 3, item 1, section 316-180 ]

3.116 A consequential amendment will be made to paragraphs 149-165(1)(b) and 149-170(1)(b) of the ITAA 1997 to ensure that a friendly society that qualifies for this relief and is also a mutual insurance company or mutual affiliate company will continue to qualify for the relief in Subdivision 149-F of the ITAA 1997. [ Schedule 3, item 18 ]

3.117 Consequential amendments will be made to Division 205 of the ITAA 1997 to include the franking debits and franking credits that may arise to a friendly society (or a wholly owned subsidiary) under these amendments. [ Schedule 3, items 20 and 21 ]

3.118 A consequential amendment will be made to exclude friendly societies from Division 315 of the ITAA 1997 where friendly societies are entitled to the relief provided by these amendments. [ Schedule 3, item 22 ]