Income Tax Assessment Act 1936

PART III - LIABILITY TO TAXATION  

Division 9AA - Demutualisation of insurance companies and affiliates  

Subdivision B - Key concepts and related definitions  

SECTION 121AM   EMBEDDED VALUE OF A MUTUAL LIFE INSURANCE COMPANY  

121AM(1)   [Embedded value]  

The embedded value of a mutual life insurance company that demutualises using a demutualisation method is, in accordance with this section, the sum of its existing business value and its adjusted net worth on the applicable accounting day (see subsection (3)).

121AM(2)   Eligible actuary and Australian actuarial practice.  

The sum is to be worked out by an eligible actuary (see subsection 121AO(3) ) according to Australian actuarial practice.

121AM(3)   Applicable accounting day.  

The applicable accounting day is:

(a) if an accounting period of the company ends on the demutualisation resolution day - that day; or

(b) in any other case - the last day of the most recent accounting period of the company ending before the demutualisation resolution day.

121AM(4)   Adjustment for changes after applicable accounting day.  

In a case covered by paragraph (3)(b), if any significant change in the amount of the existing business value or adjusted net worth occurs between the applicable accounting day and the demutualisation resolution day, the amount is to be adjusted to take account of the change.

121AM(5)   Continued business assumption.  

In working out the existing business value or the adjusted net worth, it is to be assumed:

(a) that after the applicable accounting day the company will continue to conduct its life insurance business and any other activity in the same way as it did before that day, and that it will not conduct any different business or other activity; and

(b) that the demutualisation will not occur.

121AM(6)   Discount rate assumption.  

In working out the existing business value or adjusted net worth, the annual discount rate to be used in respect of each future accounting period is worked out using the formula:

10 year Treasury bond rate

+

4.5%

+

Capital reserve adequacy     shortfall percentage

where:

10 year Treasury bond rate means the Treasury bond rate (see subsection 121AO(1) ) for the applicable accounting day in respect of bonds with a 10 year term.

Capital reserve adequacy shortfall percentage means:

(a) if, for any future accounting period, the capital reserves of the company are projected to fall below the capital reserve adequacy level (see subsection 121AO(2) ) by 1% or more at both the beginning and end of the accounting period - the percentage worked out by averaging the percentages worked out under each of the following subparagraphs:

(i) 0.2% for each 1% by which the capital reserves are projected to fall below the level at the beginning of the period;

(ii) 0.2% for each 1% by which the capital reserves are projected to fall below the level at the end of the period; or

(b) in any other case - nil.

121AM(7)   Annual inflation rate assumption.  

In working out the existing business value, the annual inflation rate to be applied is worked out using the formula:

10 year Treasury bond rate (see subsection (6))

-

4%

121AM(8)   Expenditure assumption.  

In working out the existing business value, it is to be assumed that expenditure that the company will incur, in conducting its life insurance business, on recurring items after the demutualisation resolution day will be of the same kinds and amounts (increased to take account of any inflation, using the annual inflation rate in subsection (7)) as the company incurred in the accounting period, or part of an accounting period, ending on the demutualisation resolution day.

121AM(9)   Investment return assumption.  

In working out the existing business value or the adjusted net worth, it is to be assumed that the annual rate of return on each investment of the company is:

(a) if the investment is a security with a term less than 2 years or is cash - the Treasury bond rate (see subsection 121AO(1) ) for the applicable accounting day in respect of bonds with a 26 week term; or

(b) if the investment is any other kind of security - the Treasury bond rate for the applicable accounting day in respect of bonds with a 10 year term; or

(c) in any other case - the rate mentioned in paragraph (b), plus 3%.

121AM(10)   Future distributable profits assumption.  

In working out the existing business value or the adjusted net worth, the future distributable profits are to be determined on the assumption that the company:

(a) will not distribute its profits so as to cause its capital reserves to fall below the capital reserve adequacy level (see subsection 121AO(2) ) applicable to the company; and

(b) will distribute all of its profits except to the extent necessary for its capital reserves not to fall below the capital reserve adequacy level.