• Demutualisation of Manchester Unity

    In December 2008, Manchester Unity and HCF implemented a scheme to merge their businesses. As part of that scheme, Manchester Unity undertook a demutualisation, which entitled its members to cash payments for the disposal of certain membership rights.

    Manchester Unity sent their members:

    • an initial payment for the disposal of their membership rights on 12 January  2009
    • a residual payment on 14 August 2009.

    As the demutualisation occurred in December 2008, both the initial payment and residual payment should be included when you work out your net capital gain or capital loss for the 2008-09 income year.

    What is the new law applying to the demutualisation of friendly societies?

    After the demutualisation of Manchester Unity took place, a change was made to the law. The change relates to how capital gains tax (CGT) applies to you if you are a member of a friendly society and you receive cash, shares or rights to acquire shares because the friendly society has demutualised. The changes are contained in Tax Laws Amendment (2009 Measures No. 4) Act 2009.

    Under the new law, if you received an amount of money when your friendly society demutualised you will be provided with a 'cost base' for your membership interests they disposed of under the demutualisation. You will need to know this cost base to work out whether you have made a capital gain or capital loss.

    Attention

    The changes to law take effect from 1 July 2008 and apply to the demutualisation of Manchester Unity.

    End of attention

    How do you work out if you made a capital loss on your interest in Manchester Unity?

    In August 2009, Manchester Unity sent letters to its members advising them of their cost base. They also indicated they expected their members to have a capital loss as a result of disposing of their membership interest in Manchester Unity.

    Example

    Nicky had an insurance policy with Manchester Unity on 27 August 2008. In January 2009, Nicky received a cash payment of $1,000 for the disposal of his membership interests under the demutualisation of Manchester Unity.

    In August 2009, Nicky received a residual payment of $500 for the disposal of his membership interests under the demutualisation of Manchester Unity.

    On 14 August 2009, Manchester Unity sent a letter to Nicky indicating that the valuation factor they calculated is 1.0129. Nicky will need to use this valuation factor to work out the amount of his capital loss, which he works out as follows:

    Initial payment received January 2009

    $1,000

    Plus the residual payment received August 2009

    $500

    Total proceeds received

    $1,500

    Valuation factor

    1.0129

    Nicky's cost base (total proceeds received multiplied by the valuation factor)

    $1,519.35

    Nicky's capital loss (cost base less total proceeds)

    $19.35

    Nicky makes a $19.35 capital loss as a result of disposing of his membership interests in Manchester Unity.

    Can you use your capital loss to reduce your ordinary income?

    No. This loss cannot be used to reduce your ordinary income, but can be offset against any taxable capital gains that you have in the 2008-09 income year.

    What if you declared your payments as a capital gain in your 2008-09 tax return?

    If you declared the payments you received from the demutualisation of Manchester Unity as a capital gain and you don't have capital gains from other CGT events in the 2008-09 income year, you must amend your 2008-09 tax return to:

    • remove the capital gain amount
    • enter the capital loss made on your Manchester Unity payments as a 'net capital loss carried forward to later income years'.

    If you do have capital gains from other CGT events in the 2008-09 income year, you must amend your 2008-09 tax return to:

    • reduce the total capital gain by the amount of your Manchester Unity payments
    • apply the capital loss made on your Manchester Unity payments to the amended total capital gain amount.
    Further Information

    For more information about how to:

    End of further information

    What if you did not declare the capital loss on your Manchester Unity payments?

    If you did not declare your capital loss in your 2008-09 tax return, the actions you need to take will depend on whether you made any other capital gains in the 2008-09 income year.

    If you made no other capital gains in the 2008-09 income year

    If you made no other capital gains in the 2008-09 income year, you do not have to amend your 2008-09 tax return to declare the capital loss. Just keep a record of the capital loss amount.

    If you make any capital gains in the 2009-10 income year, you can offset those gains with the capital loss you made on your Manchester Unity payments.

    If you do not make any capital gains in the 2009-10 income year, you can enter the capital loss amount from your Manchester Unity payments as a 'net capital loss carried forward to later years'.

    Attention

    There is no time limit on how long you can carry forward your net capital loss to offset against future capital gains.

    End of attention
    Further Information

    For more information about how to complete the capital gains section of your tax return, refer to Guide to capital gains tax (NAT 4151) Part B.

    End of further information

    If you made a capital gain in the 2008-09 income year

    If you made a capital gain in the 2008-09 income year, you must amend your 2008-09 tax return to apply the capital loss to (that is, deduct it from) your total capital gains.

    Attention icon

    You must apply the capital loss to any capital gains you had in the 2008-09 income year. You cannot choose to defer applying the loss to a later year.

    Direction icon

    For information about how to:

     

    What if you were not an Australian resident when the demutualisation took place?

    If you were not an Australian resident at the time of the demutualisation, you should disregard the capital loss from the payments you received under the demutualisation when lodging your Australian tax return.

    In this situation, we recommend you seek specialist advice on how tax applies to the payments received in your country of residence.

    What to do/read next

    For more information, refer to:

      Last modified: 21 Jan 2010QC 22345