RELEASE OF ISSUES PAPER ON A GENERIC TAXATION FRAMEWORK FOR DEMUTUALISATIONS
OF NON-INSURANCE ORGANISATIONS
The Treasury and the Australian Taxation Office have today jointly released an Issues Paper on a Generic Taxation Framework for Demutualisations of Non-Insurance Organisations.
The Issues Paper was prepared by officials from the Treasury and the Australian Taxation Office as part of consultation with the public on developing a generic framework for determining the taxation consequences of transactions associated with the demutualisation of non-insurance organisations. The Government announced its intention to develop this framework, in consultation with the public, in the 1997-98 Commonwealth Budget.
The Issues Paper notes that, for taxation purposes, a mutual organisation consists of participants contributing to a common fund created and controlled by them for a common purpose. Where the fund is used for the common purpose, any surplus arising (the mutual surplus) is not considered income and is therefore not taxable. Friendly societies, credit unions and associations such as social clubs are examples of non-insurance organisations which may qualify as mutuals for taxation purposes.
The Issues Paper notes that defining a non-insurance mutual organisation is an important threshold issue and seeks input into developing a suitable definition in the generic taxation framework.
In the past three years, major demutualisations in Australia have occurred primarily in the financial sector. Examples of organisations that have recently demutualised, or have announced their intention to demutualise, include National Mutual Life, Colonial Mutual Life, and the Australian Mutual Provident Society (AMP). The taxation treatment for demutualisations of insurance organisations are covered by specific provisions contained in Division 9AA of Part III of the Income Tax Assessment Act 1936.
The current taxation provisions applying to non-insurance mutuals, however, is a matter of concern to the Treasury and the Australian Taxation Office. The Issues Paper sets out these concerns, in particular that an element of double taxation exists in the capital gains tax that may be payable by (former) members of the non-insurance mutual under the existing taxation law.
It is expected that, as other sectors of the Australian economy are opened up to increased competition, some non-insurance mutual organisations may also choose to demutualise. Developing a generic taxation framework will facilitate demutualisations of non-insurance organisations by providing greater certainty about the taxation consequences of demutualisation and by removing potential anomalies in the operation of the existing law.
Seven broad policy principles are proposed in the Issues Paper. These proposed principles are consistent with those underpinning the taxation treatment afforded demutualising insurance organisations, taking into account that the insurance mutual organisations have not benefited from the taxation advantages of mutuality. The proposed principles are:
- to be treated as a demutualisation for tax purposes there must be broad continuity in the beneficial ownership of any accumulated 'mutual' surplus which is distributed or allocated upon demutualisation;
- all interests in the organisation after demutualisation are treated as post-capital gains tax assets, whether or not held by a taxpayer who became a member before 20 September 1985;
- the conversion of members' interests in non-insurance organisations by demutualisation would be exempt from capital gains tax;
- the cost base imputed to shares issued to (former) members would be the indexed costs incurred by members in acquiring and maintaining their rights of mutual participation (to the extent that such costs were not and are not allowable as a deduction);
- members would not be able to create a capital loss by demutualisation;
- where (former) members receive a cash payment to surrender their rights of mutual participation, rather than the proceeds from the sale of demutualisation shares, only the amount over and above the value of the cost base that would be imputed to their demutualisation shares would constitute assessable income for tax purposes; and
- demutualising non-insurance organisations, mutual affiliate organisations and wholly owned subsidiaries of these organisations would be required to extinguish any franking account surpluses upon demutualisation.
Submissions on the Issues Paper are required to be lodged in writing with the Treasury by 14 July 1997. Submissions may be forwarded electronically to RDC@treasury.gov.au (in text or Microsoft Word format), or be mailed to:
Business Tax Review Section
Taxation Policy Division
PARKES ACT 2600
Additional copies of the Issues Paper are available from local branches of the Australian Taxation Office, and on the Internet at http://www.treasury.gov.au and http://www.ato.gov.au.
28 May 1997
Rob Dalla-Costa (Treasury)
(06) 263 4402
Ian Pittard (Australian Taxation Office)
(06) 216 1176