Demutualisation of Friendly Societies and Capital Gains Tax

The Government has released for comment draft legislation to implement its policy to provide relief from capital gains tax (CGT) for policyholders of friendly societies that demutualise to for-profit entities.

The closing date for submissions is 15 May 2009.

The draft Tax Laws Amendment (2009 Measures No. 4) Bill 2009 provides relief from capital gains tax (CGT) for policyholders of friendly societies, including joint health and life insurers, which demutualise to for‑profit entities.

Consistent with the existing relief available for policyholders of life insurers that demutualise and the relief for policyholders of health insurers that demutualise, the Bill will provide a cost base for shares issued to policyholders that is based on:

  • the market value of the health insurance business; and
  • the embedded value of the life insurance business and any other business of the friendly society.

An equivalent cost base will also be provided to rights to acquire shares that are issued to policyholders under the demutualisation.

All policyholders of the friendly society who receive shares (or rights) will receive the same cost base calculation per share (or right).  In addition, any capital gains or losses that arise to these policyholders from them receiving these shares or rights will be disregarded.

To ensure neutrality between policyholders who receive shares (or rights to acquire shares) and policyholders who receive a cash payment, the Government will provide an equivalent cost base calculation for any rights that the policyholder exchanges for the cash payment. This will typically mean that a policyholder who receives such a payment will be taxed on the capital gain being the difference between this cost base and the cash amount received.

The Bill also deals with non-CGT consequences of demutualisation.

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