Tax Laws Amendment (2009 Measures No. 4) Act 2009 (88 of 2009)

Schedule 3 Demutualisation of friendly society health or life insurers

Part 1 Main amendment

Income Tax Assessment Act 1997

1 At the end of Part 3-32

Add:

Division 316 - Demutualisation of friendly society health or life insurers

Table of Subdivisions

Guide to Division 316

316-A Application

316-B Capital gains and losses connected with the demutualisation

316-C Cost base of shares and rights issued under the demutualisation

316-D Lost policy holders trust

316-E Special CGT rules for legal personal representatives and beneficiaries

316-F Non-CGT consequences of the demutualisation

Guide to Division 316

316-1 What this Division is about

Special tax consequences follow the demutualisation of a friendly society that provides health insurance or life insurance, or has a wholly-owned subsidiary that does.

Subdivision 316-A - Application

Table of sections

316-5 Application of this Division

316-5 Application of this Division

This Division applies in relation to a demutualisation of a*friendly society if:

(a) the society is, or has a*wholly-owned subsidiary (a health/life insurance subsidiary ) that is:

(i) a private health insurer as defined in thePrivate Health Insurance Act 2007; or

(ii) a company registered under section 21 of theLife Insurance Act 1995; and

(b) the society does not have capital divided into*shares held by its*members; and

(c) after the demutualisation the society is to be carried on for the object of securing a profit or pecuniary gain for its*members.

Subdivision 316-B - Capital gains and losses connected with the demutualisation

Guide to Subdivision 316-B

316-50 What this Subdivision is about

Disregard capital gains and losses made by any entity from a CGT event happening under the demutualisation, unless the entity:

(a) is or has been a member of the friendly society or insured through the society or any of its wholly-owned subsidiaries; and

(b) receives money for the event.

Table of sections

Gains and losses of members, insured entities and successors

316-55 Disregarding capital gains and losses, except some involving receipt of money

316-60 Taking account of some capital gains and losses involving receipt of money

316-65 Valuation factor for sections 316-60, 316-105 and 316-165

316-70 Value of the friendly society

Friendly society's gains and losses

316-75 Disregarding friendly society's capital gains and losses

Other entities' gains and losses

316-80 Disregarding other entities' capital gains and losses

Gains and losses of members, insured entities and successors

316-55 Disregarding capital gains and losses, except some involving receipt of money

(1) Disregard an entity's*capital gain or*capital loss from a*CGT event that happens under the demutualisation to a*CGT asset if:

(a) the entity:

(i) is or has been a*member of the*friendly society; or

(ii) is or has been insured through the friendly society or a health/life insurance subsidiary of the friendly society; and

(b) the CGT asset is one of these (an interest affected by demutualisation ):

(i) an interest in the friendly society as the owner or holder of a policy of insurance with the friendly society or health/life insurance subsidiary;

(ii) a*membership interest in the friendly society;

(iii) a right or interest of another kind in the friendly society;

(iv) a right or interest of another kind that arises under the demutualisation, except an interest in a lost policy holders trust (see section 316-155).

Note: Subdivision 316-D deals with the effects of CGT events happening to interests in lost policy holders trusts.

(2) Disregard a*capital gain or*capital loss of an entity (the successor ) from a*CGT event that happens under the demutualisation to a*CGT asset if:

(a) the successor is the*legal personal representative, or beneficiary in the estate, of a deceased individual who was:

(i) a*member of the*friendly society; or

(ii) insured through the friendly society or a health/life insurance subsidiary of the friendly society; and

(b) the CGT asset:

(i) forms part of the deceased individual's estate; and

(ii) devolves or*passes to the successor; and

(iii) is an interest affected by demutualisation (see paragraph (1)(b)).

316-60 Taking account of some capital gains and losses involving receipt of money

(1) This section applies if:

(a) a*CGT event happens under the demutualisation to an entity's interest affected by demutualisation (see section 316-55); and

(b) the event involves:

(i) the variation or abrogation of rights attaching to or consisting of the interest; or

(ii) the conversion, cancellation, extinguishment or redemption of the interest; and

(i) the entity is one described in paragraph 316-55(1)(a); or

(ii) the entity is one described in paragraph 316-55(2)(a) and the interest is a*CGT asset described in paragraph 316-55(2)(b); and

(d) the*capital proceeds from the event include or consist of money received by the entity.

(2) Work out whether the entity makes a*capital gain or*capital loss from the*CGT event, and the amount of the gain or loss, assuming that:

(a) the*capital proceeds from the CGT event were the amount they would be if they did not include any*market value of property other than money; and

(b) the*cost base and*reduced cost base for the interest were the amount worked out using the formula:

Capital proceeds from the CGT event x Valuation factor worked out under section 316-65

Example: Assume the entity receives $50 in money and 10 shares with a market value of $4 each in respect of CGT event C2 happening, and that the valuation factor worked out under section 316-65 is 0.9. The entity makes a capital gain from the event of $5, worked out as follows:

$50 - ($50 x 0.9)

This ignores the market value of the shares because they are property other than money.

Note: Division 114 (Indexation of cost base) is not relevant, because this section provides exhaustively for working out the amount of the cost base.

(3) The*capital gain or*capital loss is not to be disregarded, despite:

(a) section 316-55; and

(b) any provision of this Act for disregarding the*capital gain or*capital loss because the interest affected by demutualisation was*acquired before 20 September 1985.

Note: The capital gain is not a discount capital gain: see section 115-55.

316-65 Valuation factor for sections 316-60, 316-105 and 316-165

(1) For the purposes of sections 316-60, 316-105 and 316-165, the valuation factor is the amount worked out using the formula:

[[Market value of the friendly society's health insurance business (if any) + Embedded calue of the friendly society's other business (if any)] / Total capital proceeds for all entities from CGT events happening under the demutualisation to interests affected by demutualisation (except those described in subparagraph 316-55(1)(b)(iv))]

where:

embedded value of the friendly society's other business (if any) means the amount that would be the value of the*friendly society worked out under section 316-70 assuming that neither the friendly society, nor any health/life insurance subsidiary of it,*carried on any health insurance business within the meaning of thePrivate Health Insurance Act 2007.

market value of the friendly society's health insurance business (if any) means the total*market value of every health insurance business, within the meaning of thePrivate Health Insurance Act 2007,*carried on by either or both of the*friendly society and its health/life insurance subsidiaries (if any), taking account of any consideration paid to the society or subsidiary for disposal or control of that business.

(2) Disregard paragraph 316-60(2)(a) for the purposes of the formula in subsection (1) of this section.

316-70 Value of the friendly society

(1) The value of the*friendly society is the sum, worked out in accordance with this section, of the friendly society's existing business value and its adjusted net worth on the day (the applicable accounting day ) identified under subsection (3).

Eligible actuary and Australian actuarial practice

(2) The sum is to be worked out, according to Australian actuarial practice, by an*actuary who is not an employee of:

(a) the*friendly society; or

(b) a health/life insurance subsidiary of the friendly society; or

Applicable accounting day

(3) The applicable accounting day is:

(a) if an accounting period of the*friendly society ends on the day (the demutualisation resolution day ) identified under subsection (4) - that day; or

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

Demutualisation resolution day

(4) The demutualisation resolution day is:

(a) the day on which the resolution to proceed with the demutualisation is passed; or

(b) if, under the demutualisation, the whole of the*life insurance business of the*friendly society or of a health/life insurance subsidiary of the friendly society is transferred to another company under a scheme confirmed by the Federal Court of Australia - the day (or the last day) on which the transfer takes place.

Adjustment for changes after applicable accounting day

(5) 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.

Continued business assumption

(6) In working out the existing business value or the adjusted net worth, assume:

(a) that after the applicable accounting day the*friendly society, and any health/life insurance subsidiary of the friendly society, will continue to conduct*business and any other activity in the same way as before that day, and will not conduct any different business or other activity; and

(b) that the demutualisation will not occur; and

(c) that any health/life insurance subsidiary of the friendly society will continue to be a*wholly-owned subsidiary of the friendly society.

Expenditure assumption

(7) In working out the existing business value, assume that expenditure that the*friendly society and any of its health/life insurance subsidiaries will incur, in conducting*business, on recurring items after the demutualisation resolution day will be of the same kinds and amounts (increased to take account of any inflation) as it incurred in the accounting period, or part of an accounting period, ending on the demutualisation resolution day.

Friendly society's gains and losses

316-75 Disregarding friendly society's capital gains and losses

Disregard the*friendly society's*capital gain or*capital loss from a*CGT event that happens under the demutualisation.

Other entities' gains and losses

316-80 Disregarding other entities' capital gains and losses

Disregard an entity's*capital gain or*capital loss from a*CGT event that happens under the demutualisation if:

(a) the entity is established solely for the purpose of participating in the demutualisation and is not a lost policy holders trust (see section 316-155); and

(b) the CGT event:

(i) happens before or at the same time as the allocation or distribution of the accumulated surplus of the*friendly society; and

(ii) is connected to that allocation or distribution.

Note: The allocation or distribution of the accumulated surplus could happen through an arrangement involving more than one transaction.

Subdivision 316-C - Cost base of shares and rights issued under the demutualisation

Guide to Subdivision 316-C

316-100 What this Subdivision is about

The value of the friendly society and its business affects cost bases of shares and certain rights issued under the demutualisation to:

(a) entities that are or were members of the friendly society; or

(b) entities insured through the society or its subsidiaries; or

(d) the trustee of the lost policy holders trust.

Table of sections

316-105 Cost base and time of acquisition of shares and certain rights issued under demutualisation

316-110 Demutualisation assets

316-115 Entities to which section 316-105 applies

316-105 Cost base and time of acquisition of shares and certain rights issued under demutualisation

First element of cost base

(1) The first element of the*cost base and*reduced cost base of a*CGT asset is the amount worked out using the formula in subsection (2) if:

(a) the asset is a CGT asset (a demutualisation asset ) covered by section 316-110; and

(b) the asset is issued to an entity covered by section 316-115.

(2) The formula is:

Value of the CGT asset when it was issued x Valuation factor worked out under section 316-65

Time of acquisition

(3) The entity is taken to have*acquired the*CGT asset at the time it is issued.

316-110 Demutualisation assets

(1) This section covers a*CGT asset that:

(a) is:

(i) a*share in the*friendly society; or

(ii) a right to*acquire a share in the friendly society; or

(iii) a share in an entity that owns all of the shares in the friendly society; or

(iv) a right to acquire a share in an entity mentioned in subparagraph (iii); and

(b) is issued under the demutualisation; and

(i) the variation or abrogation of rights attaching to or consisting of an interest affected by demutualisation (see paragraph 316-55(1)(b)); or

(ii) the conversion, cancellation, extinguishment or redemption of an interest affected by demutualisation.

Exclusion for rights with an exercise price

(2) Despite subsection (1), this section does not cover a right to*acquire a*share in an entity if the holder of the right must pay an amount to exercise the right.

Exclusion where assets not issued simultaneously

(3) Despite subsection (1), a*CGT asset is not covered by this section unless all of the CGT assets covered by subsection (1) for the demutualisation are issued:

(a) at the same time; and

(b) to entities that are covered by section 316-115.

316-115 Entities to which section 316-105 applies

(1) This section covers an entity that:

(a) either:

(i) is or has been a*member of the*friendly society; or

(ii) is or has been insured through the friendly society or a health/life insurance subsidiary of the friendly society; and

(b) is entitled under the demutualisation to an allocation of demutualisation assets.

(2) This section also covers an entity that has become entitled to an allocation of demutualisation assets because of the death of an individual who was an entity described in subsection (1).

(3) This section also covers the trustee of a lost policy holders trust (see section 316-155).

Subdivision 316-D - Lost policy holders trust

Guide to Subdivision 316-D

316-150 What this Subdivision is about

If the demutualisation creates a trust just to hold shares, rights to acquire shares or money for entities that were members of the friendly society or insured through the society or its subsidiary, or are successors of such entities, then:

(a) capital gains or losses from CGT events happening to beneficiaries' interests in the trust are disregarded, except where the capital proceeds include money; and

(b) when a CGT event happens involving the transfer of the shares or rights to a beneficiary, or a beneficiary's absolute entitlement to them, the trustee's capital gain or loss is disregarded and the beneficiary has the same cost base and time of acquisition as the trustee; and

Table of sections

Application

316-155 Lost policy holders trust

Effects of CGT events happening to interests and assets in trust

316-160 Disregarding beneficiaries' capital gains and losses, except some involving receipt of money

316-165 Taking account of some capital gains and losses involving receipt of money by beneficiaries

316-170 Roll-over where shares or rights to acquire shares transferred to beneficiary of lost policy holders trust

316-175 Trustee assessed if shares or rights dealt with not for benefit of beneficiary of lost policy holders trust

316-180 Subdivision 126-E does not apply

Application

316-155 Lost policy holders trust

(1) This Subdivision applies if the conditions in subsections (2) and (5) are met.

First condition

(2) The first condition is that the scheme approved by a court for the demutualisation provides for a trust (the lost policy holders trust ) to exist solely for one or both of the purposes that are described in subsection (3) in relation to persons ( beneficiaries of the lost policy holders trust ) covered by subsection (4).

(3) The purposes are as follows:

(a) holding demutualisation assets (see section 316-110) that are*shares or rights to*acquire shares, or proceeds from disposal of those assets, on behalf of one or more beneficiaries of the lost policy holders trust and transferring those assets or proceeds to those beneficiaries;

(b) holding on behalf of one or more beneficiaries of the lost policy holders trust, and paying to them, money payable to them for:

(i) the variation or abrogation of rights attaching to or consisting of the beneficiaries' interests affected by demutualisation (see paragraph 316-55(1)(b)); or

(ii) the conversion, cancellation, extinguishment or redemption of those interests.

(4) This subsection covers:

(a) a person who is or has been a*member of the friendly society or is or has been insured through the*friendly society or a health/life insurance subsidiary of the friendly society; and

(b) a*legal personal representative, or beneficiary in the estate, of such a person who has died.

Second condition

(5) The second condition is that, under the demutualisation, the trustee of the lost policy holders trust is:

(a) issued with demutualisation assets that are*shares, or rights to*acquire shares; or

(b) paid money described in paragraph (3)(b) to hold and pay to beneficiaries of the lost policy holders trust.

Effects of CGT events happening to interests and assets in trust

316-160 Disregarding beneficiaries' capital gains and losses, except some involving receipt of money

Disregard a*capital gain or*capital loss of a beneficiary of the lost policy holders trust from a*CGT event that happens to the beneficiary's interest in the trust.

316-165 Taking account of some capital gains and losses involving receipt of money by beneficiaries

(1) This section applies if:

(a) a*CGT event happens to an interest of a beneficiary of the lost policy holders trust in that trust; and

(b) the*capital proceeds from the event include or consist of money received by the beneficiary.

(2) Work out whether the beneficiary makes a*capital gain or*capital loss from the*CGT event, and the amount of the gain or loss, assuming that:

(a) the*capital proceeds from the CGT event were the amount they would be if they did not include any*market value of property other than money; and

(b) the*cost base and*reduced cost base for the interest were the amount worked out using the formula:

Capital proceeds from the CGT event x Valuation factor worked out under section 316-65

Example: Assume that the beneficiary of the lost policy holders trust is paid $50 in money by the trustee to satisfy the beneficiary's interest in the trust so that a CGT event happens, and that the valuation factor worked out under section 316-65 is 0.9. The beneficiary makes a capital gain from the event of $5, worked out as follows:

$50 - ($50 x 0.9)

Note: Division 114 (Indexation of cost base) is not relevant, because this section provides exhaustively for working out the amount of the cost base.

(3) The*capital gain or*capital loss is not to be disregarded, despite sections 316-55 and 316-160.

Note: The capital gain is not a discount capital gain: see section 115-55.

316-170 Roll-over where shares or rights to acquire shares transferred to beneficiary of lost policy holders trust

(1) This section applies in relation to a*CGT event if:

(a) the CGT event happens in relation to an asset that:

(i) is a*share or a right to*acquire one or more shares; and

(ii) is held by the trustee of the lost policy holders trust on behalf of a beneficiary of the lost policy holders trust; and

(b) the CGT event happens because the beneficiary of the lost policy holders trust either:

(i) is transferred the asset by the trustee; or

(ii) becomes absolutely entitled to the asset.

Consequence for trustee

(2) Disregard a*capital gain or*capital loss the trustee makes from the*CGT event.

Consequences for beneficiary

(3) The*cost base and*reduced cost base of the asset in the hands of the trustee of the lost policy holders trust just before the*CGT event becomes the first element of the cost base and reduced cost base of the asset in the hands of the beneficiary of the lost policy holders trust.

Note: Section 316-105 affects the cost base of the asset in the hands of the trustee of the lost policy holders trust if the asset is covered by section 316-110.

(4) The beneficiary of the lost policy holders trust is taken to have*acquired the asset when the trustee acquired it.

316-175 Trustee assessed if shares or rights dealt with not for benefit of beneficiary of lost policy holders trust

(1) This section applies in relation to a*capital gain from a*CGT event if:

(a) the CGT event happens in relation to a demutualisation asset that:

(i) is a*share or a right to*acquire a share; and

(ii) is held by the trustee of a lost policy holders trust; and

(b) section 316-170 does not apply to the CGT event.

(2) For the purposes of sections 97, 98A and 100 of theIncome Tax Assessment Act 1936, the share of the net income of the trust that is attributable to the*capital gain is taken not to be included in the assessable income of a beneficiary of the trust.

(3) The trustee is not assessed, and is not liable to pay tax, in respect of the share under section 98 of theIncome Tax Assessment Act 1936.

Note: Because of these consequences in relation to sections 97 and 98 of theIncome Tax Assessment Act 1936, the trustee will be assessed on the beneficiary's share under section 99A of that Act.

316-180 Subdivision 126-E does not apply

Subdivision 126-E does not apply in relation to the demutualisation.

Note: Subdivision 126-E is about an entitlement to shares after demutualisation and scrip for scrip roll-over.

Subdivision 316-E - Special CGT rules for legal personal representatives and beneficiaries

Table of sections

316-200 Demutualisation assets not owned by deceased but passing to beneficiary in deceased estate

316-205 Interest in lost policy holders trust not owned by deceased but passing to beneficiary in deceased estate

316-200 Demutualisation assets not owned by deceased but passing to beneficiary in deceased estate

(1) This section sets out what happens if a*CGT asset:

(a) is a demutualisation asset (see section 316-110); and

(b) forms part of the estate of an individual who is an entity described in subsection 316-115(1) and has died; and

(d) *passes to a beneficiary in the individual's estate because the asset is transferred to the beneficiary by the individual's*legal personal representative.

Note: Division 128 deals with the effect of death in relation to CGT assets a person owns just before dying.

Consequence for legal personal representative

(2) Disregard a*capital gain or*capital loss the*legal personal representative makes because the asset*passes to the beneficiary.

Consequence for beneficiary

(3) The*cost base and*reduced cost base of the asset in the hands of the*legal personal representative just before the asset*passes to the beneficiary becomes the first element of the cost base and reduced cost base of the asset in the hands of the beneficiary.

(4) The beneficiary is taken to have*acquired the asset when the*legal personal representative acquired it.

316-205 Interest in lost policy holders trust not owned by deceased but passing to beneficiary in deceased estate

(1) This section sets out what happens if a*CGT asset:

(a) is an interest in a lost policy holders trust (see section 316-155); and

(b) forms part of the estate of an individual who is an entity described in subsection 316-115(1) and has died; and

(d) *passes to a beneficiary in the individual's estate because the asset is transferred to the beneficiary by the individual's*legal personal representative.

Note: Division 128 deals with the effect of death in relation to CGT assets a person owns just before dying.

Consequence for legal personal representative

(2) Disregard a*capital gain or*capital loss the*legal personal representative makes because the asset*passes to the beneficiary.

Subdivision 316-F - Non-CGT consequences of the demutualisation

Guide to Subdivision 316-F

316-250 What this Subdivision is about

In many cases, income from demutualisation is assessed through the CGT provisions rather than as ordinary income or other statutory income.

Franking debits arise for the friendly society and its subsidiaries to ensure they do not enjoy a franking surplus. Franking debits and credits arise to negate credits and debits from things attributable to the time before demutualisation.

Table of sections

316-255 General taxation consequences of issue of demutualisation assets etc.

316-260 Franking debits to stop the friendly society and its subsidiaries having franking surpluses

316-265 Franking debits to negate franking credits from some distributions to friendly society and subsidiaries

316-270 Franking debits to negate franking credits from post-demutualisation payments of pre-demutualisation tax

316-275 Franking credits to negate franking debits from refunds of tax paid before demutualisation

316-255 General taxation consequences of issue of demutualisation assets etc.

(1) An amount of*ordinary income or*statutory income (other than a*net capital gain) of an entity covered by subsection (2) is not assessable income and is not*exempt income if:

(a) the amount would otherwise be included in the ordinary income or statutory income of the entity only because a demutualisation asset (see section 316-110) was issued to the entity; or

(b) the amount is a payment made to the entity, under the demutualisation, in connection with:

(i) the variation or abrogation of rights attaching to or consisting of an interest affected by demutualisation (see paragraph 316-55(1)(b)); or

(ii) the conversion, cancellation, extinguishment or redemption of an interest affected by demutualisation; or

(c) the amount would otherwise be included in the ordinary income or statutory income of the entity only because a*share or a right to*acquire one or more shares was transferred to the entity by the trustee of a lost policy holders trust (see section 316-155); or

(d) the amount is a payment made to the entity from a lost policy holders trust in connection with:

(i) the variation or abrogation of rights attaching to or consisting of an interest affected by demutualisation; or

(ii) the conversion, cancellation, extinguishment or redemption of an interest affected by demutualisation.

(2) This subsection covers an entity that:

(a) is or has been a*member of the*friendly society; or

(b) is or has been insured through the friendly society or a health/life insurance subsidiary of the friendly society; or

(c) is issued with the demutualisation asset, or receives the payment, because of the death of a person covered by paragraph (a) or (b); or

(d) is a beneficiary of a lost policy holders trust (see section 316-155).

316-260 Franking debits to stop the friendly society and its subsidiaries having franking surpluses

(1) A*franking debit arises in the*franking account of the*friendly society or a*wholly-owned subsidiary of the society if the account is in*surplus immediately before the demutualisation resolution day identified under subsection 316-70(4).

(2) The amount of the*franking debit equals the*surplus.

(3) The*franking debit arises at the start of that day.

316-265 Franking debits to negate franking credits from some distributions to friendly society and subsidiaries

(1) This section applies if a*franking credit arises in the*franking account of the*friendly society or a*wholly-owned subsidiary of the society because a*distribution declared before the demutualisation resolution day identified under subsection 316-70(4) is made to the society or subsidiary on or after that day.

(2) A*franking debit arises in that account.

(3) The amount of the*franking debit equals the amount of the*franking credit.

(4) The*franking debit arises at the same time as the*franking credit arises.

316-270 Franking debits to negate franking credits from post-demutualisation payments of pre-demutualisation tax

(1) This section applies if a*franking credit arises in the*franking account of the*friendly society or a*wholly-owned subsidiary of the society because, on or after the demutualisation resolution day identified under subsection 316-70(4), the society or subsidiary*pays a PAYG instalment, or*pays income tax, that is wholly or partly attributable to a period before that day.

(2) A*franking debit arises in that account.

(3) The amount of the*franking debit is so much of the*franking credit as is attributable to the period before that day.

(4) The*franking debit arises at the same time as the*franking credit arises.

316-275 Franking credits to negate franking debits from refunds of tax paid before demutualisation

(1) This section applies if a*franking debit arises in the*franking account of the*friendly society or a*wholly-owned subsidiary of the society because, on or after the demutualisation resolution day identified under subsection 316-70(4), the society or subsidiary*receives a refund of income tax that is wholly or partly attributable to a period before that day.

(2) A*franking credit arises in that account.

(3) The amount of the*franking credit is so much of the*franking debit as is attributable to the period before that day.

(4) The*franking credit arises at the same time as the*franking debit arises.

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