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  • Demutualisation of insurance companies

    If you held a policy in a life insurance company or general insurance company that demutualised, you may be subject to capital gains tax (CGT) either at the time of the demutualisation or when you sell your shares (or another CGT event happens).

    A company demutualises when it changes its membership interests to shares.

    The insurance company may have given you an option to either keep your share entitlement or take cash by selling the shares under contract through an entity set up by the company.

    If it is an Australian insurance company and you chose to keep the shares, you're not subject to CGT until you eventually sell them or another CGT event happens. However, if you chose to sell your share entitlement to the company, you need to include any capital gain on your tax return in the income year in which you entered into the contract to sell the shares, even though you may not have received the cash until a later income year.

    The demutualising company will have written to all potential shareholders to advise them of the acquisition cost (sometimes referred to as the embedded value). Even though you didn't pay anything to acquire the shares, they have a value that is used as the cost base and reduced cost base for CGT purposes.

    If you sold your shares before the insurance company listed on the stock exchange and you made a capital loss, you disregard the loss.

    If you hold a policy in an overseas insurance company that demutualises, you may be subject to CGT at the time of the demutualisation. Phone us for advice (on 13 28 61) if this applies to you.

    On this page:

    Demutualisation of private health insurers

    The law relating to the CGT treatment of policy holders of health insurers who receive cash or shares when their health insurer demutualises changed with effect from 1 July 2007.

    If you held a policy of a private health insurer that converted from a not-for-profit insurer to a profit insurer by demutualising, you disregard capital gains and losses you make from a CGT event happening to your interest or other right you have or had in the insurer.

    If you received shares or rights to acquire shares as a result of the demutualisation, you will be taken (for CGT purposes) to have acquired each share or right at the time it was issued. The first element of the cost base or reduced cost base is equal to the market value of that share or right on the day they were issued.

    Any sale of the shares or rights will be a CGT event that may give rise to a capital gain or loss in the income year in which you enter into the contract of sale. This includes when the shares are sold through the sale facility.

    If you received a cash payment under the demutualisation that was not as a result of the sale of the shares or rights, you will not have made a capital gain or loss.

    Demutualisation of friendly societies

    The law relating to the CGT treatment of policy holders of friendly societies who receive cash or shares when their friendly society demutualises changed with effect from 1 July 2008.

    If you held a policy of a friendly society that demutualised from a not-for-profit friendly society to a profit friendly society, you may be able to disregard your capital gain or loss from the CGT event. You can disregard capital gains and losses you make from a CGT event happening to your interest or other right you had in the friendly society except where you received cash. Your friendly society should have advised whether you realised a capital gain or loss.

    If you received only shares, or rights to acquire shares, as a result of the demutualisation of your friendly society, we consider for CGT purposes that you acquired each share or right at the time it was issued.

    Your friendly society should have advised you of the cost base of the shares or rights to acquire shares. The cost base, or reduced cost base, will be a proportion of the total of the:

    • market value of the health insurance business, and
    • embedded value of the life insurance business and any other business of the friendly society.

    Selling the shares or rights (through the sale facility or otherwise) will be a CGT event that may give rise to a capital gain or loss in the income year in which you enter into the contract of sale.

    Last modified: 29 Jun 2018QC 52230