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EXPLAIN THE DEMUTUALISATION OF INSURANCE COMPANIES

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24
May

Demutualisation is the procedure by which a mutual company is converted to a public trading company. When a mutual company becomes demutualised then the members of the company exchange their rights of use for shares in the demutualised company. An insurance company demutualises once it changes its membership interest to shares, hence, the individual policy holders become subjected to Capital Gains Tax (CGT) either at the time of the demutualisation or when they sell those shares.

The insurance company may give you an opportunity either to retain your shares or to take cash by selling the shares under contract through an entity set up by the company. If you elect to sell your share entitlement to the company and take cash, 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 receive the cash until a later income year.

Demutualisation of private health insurers
From 1 July 2007, there was a change regarding the law pertaining to the CGT treatment of policy holders of health insurers who receive cash or shares when their health insurer demutualises. You can disregard capital gains and losses you make from a CGT event happening to your involvement or other rights you have or had in the insurer if you control or carried a policy of a private health insurer that converts from a not-for-profit insurer to a profit insurer by demutualising. You may make capital gain or capital loss in the income year only when you will sell share through the sale facility.

Demutualisation of friendly societies
From 1 July 2008, changes were made to the law relating to the capital gains tax (CGT) treatment of policy holders of friendly societies who receive cash or shares when their friendly society demutualises. You may disregard your capital gains and losses you make from a CGT event happening to your involvement or other rights you have or had in the friendly society (except where you receive an amount of money) if you hold or held a policy of a friendly society that converts from a not-for-profit friendly society to a friendly society by demutualising. You have the right to sell your share to make a capital gain or capital loss in the income year in which you enter for the contract of sale.

 


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