Relief from capital gains tax on demutualisation of friendly societies

The Assistant Treasurer, Chris Bowen MP, has announced that, with effect from 1 July 2008, the Government will provide 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 Government 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 Government will also:

  • disregard any other tax consequences that may otherwise arise to policyholders under their friendly society’s demutualisation;
  • extend the same treatment to executors and beneficiaries of a deceased policyholder’s estate who receive the shares, rights or a cash payment in the place of the deceased policyholder;
  • disregard any capital gains or losses that may arise to the friendly society under its demutualisation;
  • provide an exemption to the share tainting rules as it applies under other demutualisation rules but with reference to the market value/embedded value cost base; and
  • provide a legislative framework for a lost policyholders’ trust.
    • This will broadly facilitate the transfer of shares, rights and cash to ‘found’ policyholders without adverse or advantageous CGT consequences to the trustee.
    • It will also provide the same CGT consequences to the found policyholder as if they received the shares, rights or cash directly.
    • Any capital gains arising to the trustee from dealing with the shares, rights or cash should be assessed at the top marginal tax rate.  The trustee will be given the same market value/embedded value cost base (outlined above).

Consultation will be undertaken on the design of these amendments.

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