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Demutualisation of friendly societies and capital gains tax

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					                         TREASURY DISCUSSION PAPER


DEMUTUALISATION OF FRIENDLY SOCIETIES AND CAPITAL GAINS
TAX


                                NOTE TO PARTICIPANTS

This paper is a guide as to how the broad principles announced by the Government
might operate.


1 Introduction
On 24 October 2008, the Assistant Treasurer and Minister for Competition Policy and
Consumer Affairs, the Hon Chris Bowen MP, announced that the Government will provide
capital gains tax (CGT) relief for policyholders of friendly societies that demutualise. This
relief will apply from 1 July 2008. A copy of the press release is available on the Assistant
Treasurer’s website.

Friendly societies are defined in section 995 of the Income Tax Assessment Act 1997
(ITAA 1997) and typically provide life insurance to policyholders, though they may also
provide other services such as health insurance. This measure will provide a broadly
equivalent CGT outcome for policyholders of friendly societies relative to what is available
to policyholders of a life insurer or a health insurer that demutualises.

This policy outcome can be achieved by:

• disregarding capital gains and losses that arise on particular transactions under a friendly
  society’s demutualisation; and

• providing a cost base for shares that are issued to policyholders of the friendly society
  reflecting:

  – the market value of the friendly society’s health insurance business; and

  – the embedded value of the friendly society’s life insurance and other businesses.

Consistent with the ‘demutualisation of health insurer’ amendments, providing broader
CGT relief for a number of related transactions will provide flexibility in how a friendly
society may choose to structure its demutualisation.


2 Purpose
This discussion paper forms the basis for consultation on the design of this proposal and sets
out, in broad terms, the way it may be implemented. The purpose of this discussion paper is
to provide interested parties with an opportunity to comment on the proposal’s design.
3 Background
3.1 Operation of existing law

For taxation purposes, the principle of mutuality applies when a number of individuals
associate together for a common purpose and contribute to a common fund in which all the
individuals have an interest. Contributions to the common fund are not income of the fund
and therefore are not taxable.

Demutualisation involves the participants of such a fund giving up their rights to participate
mutually in the fund. In effect, this involves the participants giving up the right to benefit in
the future from any mutual surplus that has been (or may be) built. Upon demutualisation
there is, in effect, a distribution of any accumulated mutual surplus to the participants.

Ordinarily, the ending of the participants’ rights would trigger a CGT taxing point as the
interest in the fund is a CGT asset.

3.2 CGT demutualisation relief for life insurers

This CGT taxing point is disregarded under the current CGT provisions when the benefit of
any accumulated mutual surplus is distributed among the former mutual participants of the
organisation (in the form of shares) broadly in proportion to their mutual participation.

Division 9AA of the Income Tax Assessment Act 1936 (ITAA 1936) provides this relief for
members and policyholders of life insurers and general insurers, including friendly societies
where applicable. As part of this relief, Division 9AA provides a cost base for shares issued
to policyholders and members of a life insurer that demutualises which is based on its
‘embedded value’.

However, Division 9AA does not provide relief when the accumulated mutual surplus is
distributed in the form of a cash payment. Division 9AA also requires the demutualised
entity to become listed on the ASX.

3.3 CGT demutualisation relief for health insurers

On 26 June 2008, the Assistant Treasurer introduced Tax Laws Amendment (2008 Measures
No. 4) Bill 2008 into Parliament. Schedule 1 to this bill provides relief from CGT for
policyholders of health insurers that convert from a not-for-profit entity to a for-profit entity
by demutualising.

Specifically, these amendments disregard any capital gains or losses arising to policyholders
under their insurer’s demutualisation. The amendments also provide a market value cost
base for shares in the demutualised insurer that are issued to policyholders.

These amendments received Royal Assent on 3 October 2008.                The amendments are
contained in Division 315 of the ITAA 1997.




                                               2
4 Policy design of proposal
There are six main elements to this proposal. The proposed approach to each of these
elements is discussed below.

However, broadly consistent with the approach in section 121AB of ITAA 1936
(Division 9AA) and section 315-15 of the ITAA 1997 (Division 315) this relief will only be
available for friendly societies that meet the following ‘gateway conditions’:

• they are not carried on for the profit or gain of their policyholders; and

• they do not have capital divided into shares.

The friendly society must also convert to a for-profit entity under the demutualisation.

A key policy objective of the policy design of this proposal is to provide flexibility in how the
friendly society may choose to structure its demutualisation.

4.1 Disregard capital gains or losses that arise under the demutualisation

In the absence of specific rules, the demutualisation process will typically trigger a CGT
taxing point (usually CGT event C2) for policyholders whose rights to participate mutually
in the friendly society end under the demutualisation.           Depending on how the
demutualisation is structured, other entities (such as intermediary trusts) may also realise
capital gains or losses under the demutualisation.

4.1.1 Right to participate mutually in the friendly society exchanged for shares
Capital gains or losses that arise to individuals (who are policyholders of the friendly
society) on the ending of their rights to participate mutually in the society will be
disregarded when the gains or losses arise under the demutualisation.

• However, policyholders whose rights end in exchange for a cash payment under the
  demutualisation will be subject to CGT on this payment. Further information on the
  mechanism for achieving this outcome, including the benefit of the same cost base
  calculation that is provided to policyholders who receive shares, is available in
  section 4.2.3.

• Where this cash payment is made to the trustee of a lost policyholders’ trust instead of the
  policyholder, then any capital gains or losses arising to the policyholder under the
  demutualisation will be disregarded. Section 4.4 provides further information about lost
  policyholders’ trusts and explains how a policyholder who receives a cash payment from
  such a trust will realise an equivalent capital gain or loss at that time.

We propose to adopt the list of rights in section 315-20 of the ITAA 1997 for this proposal.
The relevant rights that may end would therefore broadly be:

• an interest in the demutualising friendly society as a policyholder;

• a membership interest in the demutualising friendly society;

• a right or interest of another kind in the demutualising friendly society; and

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



                                               3
This CGT relief will also be available to individuals who are former policyholders of the
friendly society. This will ensure that a former policyholder who realises capital gains or
losses (except on receiving a cash payment) under the demutualisation will obtain the same
relief as an existing policyholder.

Consistent with the demutualisation of health insurer amendments, this CGT relief will also
be available to individuals who are insured persons (within the meaning of section 126-42 of
the Private Health Insurance Act 2007) and former insured persons of a friendly society’s
health insurance business.

This relief will also be available, when a policyholder dies during the demutualisation
process, to an entity that is their legal personal representative (LPR). This will provide
consistent CGT outcomes between a policyholder who dies during the demutualisation
process relative to a policyholder who remains alive. Section 4.5 provides further
information about this relief for LPRs and beneficiaries of deceased policyholders.

4.1.2 The demutualising friendly society
Capital gains or losses that arise to the friendly society under its demutualisation will be
disregarded.

4.1.3 Other entities
Capital gains or losses that arise to other entities under the demutualisation may also be
disregarded. This relief will be available for entities that are established solely for the
purpose of participating in the demutualisation and where the capital gain or loss arises
from a CGT event that:

• happens under the demutualisation;

• occurs before, or at the time, the friendly society distributes its surplus to policyholders or
  to the trustee of a lost policyholders trust; and

• is connected to that distribution.

As a separate regime will be set up to facilitate the use of a lost policyholders’ trust (see
section 4.4), lost policyholders’ trusts will be excluded from this relief.

4.2 Cost base of shares and rights issued to policyholders

A friendly society may choose to distribute its accumulated mutual surplus in the form of
shares to its policyholders. Alternatively, a friendly society may choose to issue rights to
acquire shares in the demutualised entity instead of shares. This may occur when the
demutualisation is part of a broader merger arrangement with another entity.

In the absence of specific rules, the cost base of shares, or rights to acquire shares, that are
issued to policyholders in exchange for the ending of their rights to participate mutually in
the friendly society will typically be equal to the value of these rights (rights to participate
mutually).

4.2.1 Cost base of shares
To qualify for the following cost base, the shares must be issued in the demutualised friendly
society or a company that, under the demutualisation, ends up wholly owning the
demutualised friendly society. All of the shares issued to policyholders and the trustee of
the lost policyholders’ trust must be issued at the same time.


                                               4
• This cost base will only be available where the friendly society distributes its mutual
  surplus in the form of shares or rights to acquire shares only.

The first element of the cost base (or reduced cost base) of a share issued to policyholders or
the trustee of the lost policyholders’ trust under the demutualisation will be calculated
according to the following formula:

       (Market value of health insurance business + Embedded value of all other businesses)
   (Total number of shares issued + Total number of shares that can be acquired by issued rights)

• The market value of the health insurance business will be calculated on the day the shares
  are issued.

• The embedded value calculation of all other businesses will broadly be based on the rules
  in section 121AM in Division 9AA of the ITAA 1936. This provision provides that a life
  insurer’s embedded value is the sum of its existing business value and its adjusted net
  worth. The provision also requires various assumptions to be made in calculating these
  values.

• The total number of shares issued includes shares issued under the demutualisation to
  policyholders and the trustee of the lost policyholders’ trust.

• The total number of shares that can be acquired by issued rights will include all shares
  that can be acquired by the rights discussed in section 4.2.2.

All policyholders of the friendly society who receive shares will receive this cost base for
their shares. Consistent with the principles in section 4.1.1, this cost base will extend to
shares issued to former policyholders, insured persons and former insured persons and a
deceased policyholder’s LPR.

These entities will be taken to have acquired the shares at the time they are issued.




                                                 5
Example 1
Assume a friendly society Healthy Living Friendly Society Ltd (Healthy Living)
demutualises and issues 100 million shares (and no rights to acquire shares) under its
demutualisation. A total of 80 million shares are directly issued to policyholders and a
further 20 million shares are issued to the trustee of the lost policyholders’ trust. The market
value of the health insurance business is $70 million and the embedded value of its other
business (life insurance) is $10 million.

The first element of the cost base of each share that is issued to all policyholders and the
trustee of the lost policyholders’ trust is calculated as follows:

• Market value of health insurance business is $70 million.

• Embedded value of all other businesses is $10 million.

• Total number of shares issued is 100 million.

• Total number of shares that can be acquired by issued rights is 0.

           $70,000,000+$10,000,000
That is,
                100,000,000+0

The first element of the cost base for each share would be $0.80.


4.2.2 Cost base of rights to acquire shares
To qualify for this cost base, the shares that can be acquired by the rights must be in the
demutualised friendly society or a company that, under the demutualisation, ends up wholly
owning the demutualised friendly society. All the rights to acquire shares must be issued at
the same time and must have an exercise price of zero.

• This cost base will only be available where the friendly society distributes its mutual
  surplus in the form of shares or rights to acquire shares only.

The first element of the cost base (or reduced cost base) of a right to acquire shares that is
issued to policyholders of the friendly society or the trustee of the lost policyholders’ trust
under the demutualisation will be calculated according to the following formula:

    (Market value of health insurance business + Embedded value of all other businesses)
(Total number of shares issued + Total number of shares that can be acquired by issued rights)

All policyholders of the friendly society who receive rights to acquire shares will receive this
cost base for the rights. Consistent with the principle in section 4.1.1, this cost base will
extend to rights issued to former policyholders, insured persons and former insured persons
and a deceased policyholder’s LPR.

These entities will be taken to have acquired the rights at the time they are issued.




                                                6
Example 2
Assume Healthy Living demutualises and, as part of a broader merger with Live Healthily
Friendly Society Ltd (Live Healthily), distributes its mutual surplus in the form of rights to
acquire shares in Live Healthily. Healthy Living subsequently issues 10 million rights to its
policyholders (and no shares) under its demutualisation. Collectively these rights allow the
holders to acquire 40 million shares in Live Healthily (that is, each right allows the holder to
acquire 4 shares).

The first element of the cost base of each right that is issued to policyholders or the trustee of
the lost policyholders’ trust is calculated as follows:

• Market value of health insurance business is $70 million.

• Embedded value of all other businesses is $10 million.

• Total number of shares issued is 0.

• Total number of shares that can be acquired by issued rights is 40 million.

           $70,000,000+$10,000,000
That is,
                 0+40,000,000

The first element of the cost base provided to each right would be $2.



4.2.3 Cost base of rights as mutual participants
Policyholders who receive a cash payment under the demutualisation in exchange for the
ending of their rights to participate mutually in the friendly society will typically realise a
taxable capital gain on this transaction.

However, to ensure neutrality between policyholders who receive shares and policyholders
who receive cash, policyholders who receive a cash payment will also receive an equivalent
cost base calculation to that which is outlined in sections 4.2.1 and 4.2.2 for their rights to
participate mutually in the friendly society.

• This cost base modification will only be available where the friendly society distributes its
  mutual surplus in the form of a cash payment only.

This outcome can be achieved by modifying the application of the cost base rules to these
rights and deeming the first element of the cost base (or reduced cost base) of these rights to
be calculated according to the following formula:


(Market value of health insurance business + Embedded value of all other businesses)
                                                                                     × Cash payment received
                             (Total cash payment made)

• The total cash payment made includes the sum of the amounts paid to all policyholders
  and the trustee of the lost policyholders’ trust.

• The cash payment received is the amount received by the individual policyholder.




                                                     7
As noted in section 4.1.1, policyholders who are entitled to receive a cash payment under the
demutualisation will not be subject to CGT on that payment if it is made to the trustee of a
lost policyholders’ trust.

Example 3
Assume that Healthy Living demutualises and distributes its mutual surplus in the form of a
cash payment. The total cash payment distributed is $85 million.

Under Healthy Living’s demutualisation, Bob, a policyholder receives a $1,000 payment.

Bob would calculate the first element of his cost base as follows:

• Market value of health insurance business is $70 million.

• Embedded value of all other businesses is $10 million.

• Total cash payment made is $85 million.

• Cash payment received is $1,000.

           $70,000,000+$10,000,000
That is,                           × $1, 000
                 $85,000,000

The first element of Bob’s cost base for these rights would be $941.18.

Assuming Bob has incurred no other costs in relation to these rights, Bob would realise a
capital gain of $58.82.



4.3 Other tax consequences to policyholders

In some circumstances the distribution of a friendly society’s surplus to its policyholders
may be assessable as a dividend.

4.3.1 Disregard other tax consequences to policyholders
Policyholders who receive shares, rights to acquire shares or a cash payment under their
friendly society’s demutualisation in exchange for the ending of their rights to participate
mutually in the society will not need to include any other amount (apart from any capital
gains, where applicable) in their assessable income as a result of receiving the shares, rights
or cash payment.

4.4 Lost policyholders’ trust

It is usually a general demutualisation requirement that eligible policyholders verify their
details with the demutualising entity and agree to receive their share of the accumulated
mutual surplus. Typically, there will be a significant number of individuals that fail to do so.
Shares or rights to acquire shares that would otherwise be allocated to these individuals may
instead be held on trust.




                                               8
In addition, shares or rights to acquire shares will typically not be issued to individuals who
are registered at an overseas address (regardless of whether or not they are an Australian
resident for tax purposes). Instead these shares or rights may be held on trust.

This trust is typically called a lost policyholders’ trust. The trust may be set up to hold
shares, or rights to acquire shares and the cash payment for policyholders who are entitled to
receive a share of the insurer’s surplus, but are unable to receive their share of it directly
(‘lost policyholders’). The trust generally exists for a finite period to allow these
policyholders an opportunity to either:

• receive their shares, rights, or cash payment from the trust; or

• have the trustee, on their behalf, dispose of their shares or rights and distribute the
  proceeds to them.

A ‘found policyholder’ is a policyholder who was formerly lost but since becomes able to
receive their share of the surplus. The concept of a lost policyholder and a found
policyholder will also extend to an LPR of a deceased policyholder including a deceased lost
policyholder.

In the absence of specific CGT rules:

• shares and rights to acquire shares that are issued to the trustee of the lost policyholders’
  trust will typically have a minimal cost base;

• a CGT taxing point (generally CGT event E5 or E7) will arise on the transfer of assets in
  the trust to a found policyholder;

• the found policyholder will typically acquire the shares with a minimal cost base; and

• the found policyholder will acquire the shares at the time of receipt.

These rules will facilitate the issue of shares, rights to acquire shares or the making of a cash
payment to the trustee of a lost policyholders’ trust, and their transfer to a ‘found
policyholder’, without adverse or advantageous CGT consequences to the trustee or
policyholder.

This relief will only be available when the following requirements are satisfied:

• the friendly society’s demutualisation scheme that is approved by the court approving of
  the demutualisation provides for the trust;

• the trust exists for the sole purpose of holding shares, rights to acquire shares or a cash
  payment on behalf of lost policyholders; and

• the shares or rights are issued or a cash payment is made to the trustee under the friendly
  society’s demutualisation.

4.4.1 Issue of shares and rights to trustee of the lost policyholders’ trust
For CGT purposes, the trustee of the lost policyholders’ trust will acquire the shares or rights
to acquire shares at their issue time.

The first element of the cost base (or the reduced cost base) of these shares or rights is
calculated as set out in sections 4.2.1 and 4.2.2 respectively.



                                                  9
4.4.2 Transfer of assets to found policyholders
Capital gains or losses arising to the trustee will be disregarded from:

• the transfer of assets in the lost policyholders’ trust to a found policyholder; or

• the found policyholder becoming absolutely entitled to assets in the lost policyholders’
  trust.

There will be no requirement that these assets be the same assets that were originally issued
under the demutualisation to the trustee of the lost policyholders’ trust. This ensures, for
example, that if shares in the lost policyholders’ trust are subject to a scrip for scrip takeover
(and the scrip for scrip roll-over is available), the replacement shares can be distributed to
found policyholders.

The found policyholder will be taken to have acquired each of the assets at the same time as
when the trustee of the lost policyholders’ trust acquired them. The first element of the cost
base (or the reduced cost base) of each of the transferred assets will be equal to the asset’s
cost base in the trustee’s hands.

Any capital gains or losses arising from the trustee dealing with the assets in any other way
will be assessed to the trustee under section 99A of the ITAA 1936. We propose to adopt a
similar approach to that in section 315-155 of the ITAA 1997 as used for the demutualisation
of health insurers.

4.4.3 Transfer of cash payment to policyholder
Found policyholders who have a right to receive a cash payment from a lost policyholders’
trust will typically realise a capital gain on the ending of that right (arising under
CGT event C2) when they receive the cash payment. In this case, the capital gain or loss
would generally be equal to the value of the cash payment less any costs incurred in
acquiring the right. To ensure consistency with policyholders who realise a capital gain or
loss (relative to a modified cost base as provided in section 4.2.3) when they directly receive a
cash payment under their society’s demutualisation, found policyholders who later receive
their cash payment from a lost policyholders’ trust should also realise an equivalent capital
gain or loss at that time.

This outcome can be achieved by modifying the application of the cost base rules to this right
to receive the payment and deeming the first element of the cost base (or reduced cost base)
of this right to be calculated according to the following formula:


(Market value of health insurance business + Embedded value of all other businesses)
                                                                                     × Cash payment received
                              Total cash payment made




                                                     10
Example 4
Further to Example 3, but assume that unlike Bob who receives his payment directly, a
$1,000 payment to Mary is instead made to the trustee of the lost policyholder’s trust
(Healthy Living’s Lost Trust) to hold on behalf of Mary.

Any capital gains or losses arising to Mary from this payment being made to the trustee of
the Healthy Living’s Lost Trust will be disregarded.

Six months later, Mary agrees to receive the $1,000 payment from Healthy Living’s Lost
Trust and her right to the payment ends.

Mary calculates the first element of the cost base for this right as follows:

• Market value of health insurance business is $70 million.

• Embedded value of all other businesses is $10 million.

• Total cash payment made is $85 million.

• Cash payment received is $1,000.

           $70,000,000+$10,000,000
That is,                           × $1, 000
                 $85,000,000

The first element of Mary’s cost base for these rights would be $941.18.

Assuming Mary has incurred no other costs in relation to these rights, Mary would realise a
capital gain of $58.82.



Other dealings by the trustee of a cash payment that was held on behalf of a lost
policyholder (apart from passing it to the policyholder) will realise a capital gain or loss
equal to the difference between the value of the cash (capital proceeds) and this cost base
value. This will require a new CGT event.

• However, this principle will not apply to situations when, on the found policyholder’s
  request, the trustee disposes of the assets in the trust and gives them the proceeds. In this
  situation, the found policyholder will become absolutely entitled to the asset and, per the
  principle set out in section 4.4.2, will pick up an equivalent cost base to that in the hands
  of the trustee of the lost policyholders’ trust. Any capital gains or losses arising to the
  trustee from this transaction will be disregarded.

This capital gain or loss arising to the trustee from any other dealings with the cash payment
will be assessed to the trustee under section 99A of the ITAA 1936.

4.5 Issue of shares and rights to deceased policyholder’s LPR

If a policyholder is entitled to receive shares, rights to acquire shares or a cash payment
under their friendly society’s demutualisation but dies during the demutualisation process,
then typically the shares or rights will be issued or the cash payment made to their LPR.
This means that any capital gains or losses arising from the demutualisation that would have



                                                11
been realised by the deceased policyholder, had they remained alive, will instead be realised
by the LPR or beneficiary of their estate.

In the absence of specific rules, the LPR will typically not receive the same modified cost base
for the shares or rights that the deceased policyholder would have received (had they
remained alive) and the subsequent transfer of the shares or rights from the LPR to a
beneficiary of their estate will trigger a CGT taxing point.

However, had the policyholder died soon after receiving the shares or rights, then their LPR
would have typically received the shares or rights with the same cost base (as in the hands of
the deceased policyholder), and any capital gains or losses arising from the transfer of the
shares to the beneficiary would be disregarded. This is because the CGT roll-over on death
(Division 128 of the ITAA 1997) is available for assets that are owned by a deceased taxpayer
prior to their death. However, the relief does not extend to assets that are not owned by the
deceased (even if the deceased had an entitlement to them).

4.5.1 Issue of shares or rights to a deceased policyholder’s LPR
If a deceased policyholder’s LPR becomes entitled to receive shares or rights to acquire
shares under a friendly society’s demutualisation because of an ending of the deceased
policyholder’s rights to participate mutually in the friendly society, then the shares will:

• be taken, for CGT purposes to have been acquired by the LPR at their issue time; and

• receive the same first element of the cost base (or reduced cost base) that the deceased
  policyholder would have obtained had they received the shares or rights (as calculated
  under sections 4.2.1 or 4.2.2 respectively).

4.5.2 Passing of shares or rights to a deceased policyholder’s beneficiary
Capital gains or losses arising from shares or rights that were issued to a deceased
policyholder’s LPR passing to a beneficiary of the deceased policyholder’s estate will be
disregarded.

In addition, the beneficiary will:

• be taken, for CGT purposes, to have acquired each of the shares or rights at the same time
  as the LPR acquired them (the issue time); and

• receive, as the first element of the share or right’s cost base (or reduced cost base) the
  same cost base for the asset as in the LPR’s hands.

4.6 Share capital tainting rules exemption

The share capital tainting rules (contained in Division 197 of the ITAA 1997) are integrity
rules designed to prevent a company from disguising a distribution of profits as a
tax-preferred capital distribution by transferring profits into its share capital account and
subsequently making distributions from that account.

Sections 197-30, 197-35 and 197-37 of the ITAA 1997 provide exemptions to these rules when
entities demutualise under the demutualisation regimes in Schedule 2H and Division 9AA of
the ITAA 1936 and Division 315 of the ITAA 1997 respectively and transfer amounts to their
share capital account.




                                               12
4.6.1 Exemption for friendly societies that demutualise
A company’s share capital account will not become tainted if an amount is transferred to the
account and:

• the company is a demutualised friendly society (or a company that wholly owns the
  demutualised friendly society) and these amendments apply to the friendly society’s
  demutualisation; and

• the amount is transferred in connection with the demutualisation.

However, this exclusion will only apply to so much of the transferred amounts that do not
exceed the cost base value (as outlined in section 4.2.1), on the day of issue, of:

• shares issued to participating policy holders; and

• shares issued to the trustee of the lost policy holders trust.


5 Submissions
We invite interested parties to lodge written submissions on the design of this proposal and
whether the proposal will accommodate the different structures used by friendly societies.
We also encourage the identification of any other issues, including interaction issues with
other parts of the tax law, that may be relevant to the design of this proposal. While
submissions may be lodged electronically, by post or by facsimile, electronic lodgement is
preferred.

Some specific questions to consider when preparing submissions include:

• Will the gateway conditions to this relief outlined in section 4 prevent some friendly
  societies from demutualising and, if so, why? Are there specific structures that are used
  by friendly societies which will need to be accommodated by the gateway conditions to
  this relief?

• Is there a need to include an additional requirement in the gateway conditions that the
  mutual surplus must be distributed under the demutualisation to policyholders in
  proportions that are broadly consistent with their mutual participation?

• Could a friendly society’s demutualisation occur through the variation of the
  policyholders’ rights to participate mutually in the friendly society rather than the ending
  of these rights?

• For simplicity, the cost base calculation formulas assume that a friendly society will only
  distribute its mutual surplus in the form of shares, rights to acquire shares or cash. The
  formulas assume that a friendly society will not distribute its mutual surplus partially in
  the form of shares (or rights to acquire shares) and an additional cash payment. Is there a
  need for the formulas to facilitate these types of composite distributions?

• Will the proposed approach for calculating the embedded value of a friendly society’s
  non-health insurance business lead to practical difficulties for the friendly society and, if
  so, is there an alternative approach for calculating the embedded value?




                                               13
• Is the approach taken to calculating the market value of a friendly society’s health
  insurance business (based on the time the surplus is distributed) appropriate or should an
  alternative approach be taken?

• Will the broader relief for related transactions facilitate a wide range of demutualisations?

• Are there any alternative ways of distributing cash payments to policyholders, including
  ‘lost policyholders’ that are not addressed in this paper? Could an alternative approach
  be taken to assessing any tagged capital gain or loss to a found policyholder who receives
  their cash payment from a lost policyholders’ trust?

• Are there any alternative mechanisms for assessing a capital gain to the trustee of the lost
  policyholders’ trust in situations when the lost policyholder does not receive the cash
  payment?

The closing date for submissions is Friday 5 December 2008.

All information (including name and address details) contained in submissions will be
made available to the public on the Treasury website unless you indicate that you would like
all or part of your submission to remain in confidence. Automatically generated
confidentiality statements in emails do not suffice for this purpose. Respondents who would
like part of their submission to remain in confidence should provide this information
marked as such in a separate attachment. A request made under the Freedom of Information
Act 1982 for a submission marked 'confidential' to be made available will be determined in
accordance with that Act.

Written submissions should be addressed to:

The General Manager
Business Tax Division
The Treasury

Langton Crescent
PARKES ACT 2600

Fax: (02) 6263 4466

Email: cgt_demutualisation@treasury.gov.au



Other enquiries may be directed to:

Philip Akroyd
Capital Gains Tax Unit
Business Tax Division
The Treasury

Langton Crescent
PARKES ACT 2600

Phone: (02) 6263 4385




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posted:4/18/2010
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Description: Demutualisation of friendly societies and capital gains tax