I am releasing today a draft of proposed amendments to the Income Tax Assessment Act 1936.
The Treasurer announced in the 1998-99 Budget the Government’s intention to introduce a generic taxation framework applying to demutualisations of mutual non-insurance organisations. The proposed amendments introduce that generic framework. The framework will apply to demutualisations completed on or after 12 May 1998.
The Government has consulted with interested parties on the implementation of the framework. The consultation period followed the release of an Issues Paper on 28 May 1997.
The framework applies to a demutualisation that occurs under a specified method. All of the methods of demutualisation require that the interests of members in the mutual organisation be extinguished in exchange for ordinary shares in the demutualised organisation.
The framework will only apply to those demutualisations where broad continuity of beneficial interest is maintained. However, a small proportion of demutualisation shares can be issued to non-members.
The framework provides that capital gains tax will not apply to the surrender by a member of membership interests in the demutualising entity. Any capital gains tax liability will therefore be deferred until the disposal of the demutualisation shares.
The framework also establishes, for capital gains tax purposes, the date and cost of acquisition of shares acquired by former members as part of the demutualisation process. Broadly, the cost of acquisition for pre-CGT members will be determined by reference to the member’s share of the market value of the demutualising entity immediately before demutualisation. For post-CGT members, the cost will be determined by reference to the costs incurred by the member in acquiring and maintaining membership to the extent that those costs are not deductible.
In addition, the framework will allow demutualising entities to retain any franking account surpluses accumulated prior to demutualisation.
The provisions and explanatory material can be accessed from the Internet on ‘http://www.treasurer.gov.au/assistanttreasurer’ or by phoning (02) 6263 4453.
4 February 1999
Contact Officers:
Penny Farnsworth, Assistant Treasurer’s Office (02) 6277 7360
Gary Martin, Australian Taxation Office (02) 6263-4453