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Tax treatment of de-mutualisations of life assurance and general assurance organisations

EMBARGO Not for release before 7.30pm AEST, 9 May 1995

I am today announcing important new taxation arrangements to apply on a de-mutualisation of a life assurance organisation or a general assurance organisation.

The new arrangements, which are set out below, will benefit members of de-mutualising organisations and will provide greater certainty for these organisations.

(a) The disposal of a member's (or deemed member's interest) in the mutual will be exempt from CGT.

Deemed members could include those who hold policies through a trustee of a superannuation fund.

This approach will be mirrored for those who are subject to tax under section 25 or any other revenue provision, rather than under Part IIIA, of the Income Tax Assessment Act 1936.

(b) The allotment of shares (or rights to shares) on de-mutualisation to former members will be deemed to be the creation of new assets for CGT purposes. This means that all shares or rights to shares will be treated as post- 1985 assets; and if any CGT liability arises, it will be payable only on a disposal of the shares or rights to shares.

This approach will be mirrored for those taxpayers who fall under section 25 or any other income provision of the ITAA; therefore the disposal would be assessable income but an amount equivalent to the cost base would be allowed as a deduction. So only any value over and above the "cost base" would be taxed.

(c) In the case of life offices, the cost base for the former member's shares will be set with reference to an independent actuarial assessment of the "embedded value" of the organisation as if it were a company as at the date of de-mutualisation. The resultant "embedded value" is conceptually equivalent to net tangible assets. The Government will set the key parameters, such as discount rates and expenses assumptions, for this assessment.

"De-mutualisation" occurs at the date when the members' vote to de-mutualise takes effect. The independent valuation of the cost base would be based on the last financial year accounts (unless some major event after the valuation date significantly alters this valuation).

The Commissioner of Taxation and the Government Actuary will consult with the Institute of Actuaries on the details of the appropriate method of calculating embedded value in the case of de-mutualisations.

After listing, the cost base will be the lower of embedded value or listing price. 'Listing' price will be defined to be the closing price on the first day of trading.

(d) In the case of general insurers, the cost base will be set with reference to the net tangible assets of the organisation as at the date of de-mutualisation. After listing, the cost base will be the lesser of this amount or the listing price.

(e) Where a partial sale is involved, the embedded value or net tangible assets cost base will be determined on the basis of clause (c) or (d) above prior to the sale (ie, prior to any transaction associated with the de-mutualisation such as an offer made by a potential purchaser).

(f) The cost base will be indexed from the date of de-mutualisation.

(g) Prior to listing, capital losses would not arise on the disposal of shares or rights to shares. This means that if the subsequent sale price of shares or rights to shares were lower than the deemed cost base, then the cost base would be reduced to an amount equal to the (lower) sale price.

(h) Allotments of shares and payments of cash in lieu will be treated consistently.

(i) In the case of general insurers, any franking account balance held by the mutual organisation or its subsidiaries will be extinguished.

(j) To prevent tax avoidance, this approach will be available only in respect of resident mutual organisations existing at 7.30pm AEST, 9 May 1995. The current law will operate in all other cases.

(k) The taxation treatment within the de-mutualised company structure will be treated consistently. For example, the taxation treatment of a holding company will reflect the sum of the shareholder members' cost base and will also be indexed from the date of de-mutualisation.

Although the above approach refers specifically to general and life assurance mutual organisations, if other mutual organisations (such as building societies and friendly societies) were to approach the Government, then the principles underlying the approach would also apply.

The Government will introduce amendments into Parliament to give effect to these new arrangements as soon as practicable.