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Taxation Laws Amendment (Demutualisation of
Non-insurance Mutual Entities) Bill 1999
Date Introduced: 11 March 1999
House: House of Representatives
Commencement: Upon the Royal Assent
Amendment (Demutualisation of Non-insurance Mutual Entities) Bill
1999 (the Bill), introduces a generic taxation framework applying
to demutualisations of mutual non-insurance organisations.
- Applies to a demutualisation that occurs under one of three
- Will only apply to those demutualisations where broad
continuity of beneficial interest is maintained
- Provides that CGT will not apply to the surrender by a member
of membership interests in the demutualising entity. Any CGT
liability will therefore be deferred until the disposal of the
- Establishes for CGT purposes, the date and cost of acquisition
of shares (including bonus shares) acquired by members as part of
the demutualisation process, and
- Will allow demutualising entities to retain any franking
account surpluses accumulated before demutualisation.
The proposed amendments will apply to
demutualisations that are completed on or after 12 May 1998.
1. Mutual company
A mutual company is a company without issued
capital stock owned by its members.(1)
A mutual company's ownership structure
distinguishes it from conventional corporations. Voting rights in
most companies are determined by shareholdings, with one vote per
share. Mutuals have one vote per member regardless of each member's
financial commitment to the company.
In a mutual company ownership arises from
membership, which is based upon the acquisition of a product or
service from the company rather than by the contribution of
Many mutually owned financial organisations were
originally established as cooperatives. Members pooled resources to
achieve specific objectives, such as providing life insurance or
low-cost housing finance.
Mutuals distribute profits through bonuses, or
reduced premiums and charges. Profits are also commonly reinvested
in the company. The accretion of reserves in this way is the main
avenue available to build capital.
The decision to demutualise may be driven by
many factors including the need to access external capital to
finance expansion, diversification or to enable the mutual to
compete more effectively in the market.
2. 'Mutual entity' for the purposes
of the Income Tax Assessment Act 1936
For the purposes of the Income Tax
Assessment Act 1936 (ITAA36) (pursuant to new section
326-10) an entity will be a mutual entity if:
- It is a body corporate
- It is not an insurance company or a mutual affiliate
- It is not carried on for the object of securing a profit
- It does not have shareholders, and
- It does not hold property in which its members have a
disposable interest, except in the event of winding up.
Schedule 1 - Income Tax
Assessment Act 1936
Part 1 - Insertion of Schedule 2H -
Demutualisation of mutual entities other than insurance
New Division 326 sets out the
taxation consequences of the demutualisation of mutual entities
other than insurance companies.
Under new Subdivision 326-A,
new Division 326 will apply to demutualisations if
the following criteria are satisfied:
- The demutualisation resolution day was 4 February 1999 or
- The entity was a resident immediately before the
- The demutualisation was implemented in one of three specified
- The continuity of beneficial interest test is satisfied,
- The demutualisation was or is completed on or after 12 May
2. Three methods of
The proposed framework will apply to a
demutualisation that occurs under one of three methods specified in
new Subdivision 326-B.
2.1 Direct method - issue of demutualisation shares
directly to members
(New section 326-45)
Under this method ordinary shares of one class
in the entity are issued within the limitation period to existing
members. In return membership rights in the entity are
Shares of the same class may also be issued to
2.2 Holding company method - holding company interposed
between mutual entity and members
(New section 326-50)
Under this method, shares of one class in the
entity are issued within the limitation period to a holding
Shares of one class in the holding company are
then issued within the limitation period to existing members. In
return membership rights in the entity are extinguished.
Shares of the same class may also be issued to
2.3 Distributing trust method - distributing trust
interposed between mutual entity and members
(New section 326-55)
Under this method, the entity issues special
shares (which carry only voting rights in respect of the entity)
within the limitation period to the trustee of a distributing trust
to hold for the benefit of existing and new members.
This issue takes place before the issue of
After the issue of the ordinary shares to the
trustee, in return for which membership rights are extinguished,
the rights attaching to the special shares must become the same as
those attaching to ordinary shares. The special shares must then be
treated as ordinary shares.
3. Continuity of beneficial
New section 326-60 states that
the continuity of beneficial interest test must be satisfied before
Division 326 applies to a demutualisation.
The continuity of beneficial interest test is
- At least 90% of the ordinary shares that are issued in
connection with the demutualisation are issued to existing members,
- The net assets of the entity on the resolution day are
distributed in the form of shares to existing members to broadly
accord with their mutual participation.
4. CGT consequences
New Subdivisions 326-C to
326-N deal with the myriad of potential CGT
implications for demutualisation.
Generally the proposed measures will:
- Provide that a capital gain or loss arising from the surrender
of a membership interest in a mutual organisation will be
disregarded (New section 326-65)
- Ensure that on the issue of demutualisation shares, no amount
is included in a member's assessable income (New section
- Prescribe the date and cost of acquisition of shares (including
bonus shares) acquired by members in an entity (including its
holding company) as part of the demutualisation process
(New Subdivisions 326-D and
Basically cost bases will be determined by reference to whether a
member is a pre-CGT member or a post-CGT member.
Generally for pre-CGT members the cost of acquisition will be
determined by reference to the member's share of the market value
of the entity immediately before demutualisation. For post-CGT
members, the cost will be determined by reference to the
non-deductible costs incurred by the member in acquiring and
- Provide that where a member acquires a right to the issue of
shares and the member disposes of that right or interest otherwise
than by receiving the shares, the date and cost of acquisition will
be determined as if the member had disposed of the shares in the
entity (New Subdivision 326-G)
- Ensure that where the distributing trust method of
demutualisation is used and special shares are converted to
ordinary shares, no disposal will be taken to have occurred for CGT
purposes (New Subdivision 326-H), and
- Ensure that a payment out of the assets of a demutualised
entity after demutualisation to a shareholder will not be taken to
be a payment of a dividend. The payment will not be assessable as a
dividend but the cost base of the shares will be reduced by the
amount of the payment. If the payment is more than the share's cost
base the shareholder will make a capital gain. (New section
Part 2 - Consequential
1. Franking account surpluses can be
retained on demutualisation
Amendments to sections 160ARDM and 160ARDQ will
allow demutualising entities to retain any franking account
surpluses accumulated prior to demutualisation.
From 1 July 1998, special rules apply where a
company 'taints' its share capital account by transferring amounts
to it from other accounts. If a company's share capital account is
tainted, distributions debited to that account are treated as
unfrankable and unrebatable dividends.
Pursuant to amendments inserted by Items
2 and 3 an amount transferred to a share
capital account in connection with a demutualisation will not taint
the share capital account.
Schedule 2 - Income Tax
Assessment Act 1997
1. Consequential amendments to CGT
provisions concerning acquisition and cost base.
Amendments to sections 109-60 and 112-97 by
Items 2 and 3 confirm that:
- there is an acquisition for CGT purposes in relation to a
demutualisation on the demutualisation resolution day.
- the general rules about cost base and reduced cost base of an
asset are modified by new Division 326.
- Graham Bannock, R E Baxter & Ray Rees, A Dictionary of
Economics, Penguin Books, p. 294.
30 March 1999
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