The Assistant Treasurer, Chris Bowen MP, has announced that, with effect from 1 July 2008, the Government will provide relief from capital gains tax (CGT) for policyholders of friendly societies, including joint health and life insurers, which demutualise to for‑profit entities.

Consistent with the existing relief available for policyholders of life insurers that demutualise and the relief for policyholders of health insurers that demutualise, the Government will provide a cost base for shares issued to policyholders that is based on:

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

An equivalent cost base will also be provided to rights to acquire shares that are issued to policyholders under the demutualisation.

All policyholders of the friendly society who receive shares (or rights) will receive the same cost base calculation per share (or right).  In addition, any capital gains or losses that arise to these policyholders from them receiving these shares or rights will be disregarded.

To ensure neutrality between policyholders who receive shares (or rights to acquire shares) and policyholders who receive a cash payment, the Government will provide an equivalent cost base calculation for any rights that the policyholder exchanges for the cash payment.  This will typically mean that a policyholder who receives such a payment will be taxed on the capital gain being the difference between this cost base and the cash amount received.

The Government will also:

• disregard any other tax consequences that may otherwise arise to policyholders under their friendly society’s demutualisation;
• extend the same treatment to executors and beneficiaries of a deceased policyholder’s estate who receive the shares, rights or a cash payment in the place of the deceased policyholder;
• disregard any capital gains or losses that may arise to the friendly society under its demutualisation;
• provide an exemption to the share tainting rules as it applies under other demutualisation rules but with reference to the market value/embedded value cost base; and
• provide a legislative framework for a lost policyholders’ trust.
  • This will broadly facilitate the transfer of shares, rights and cash to ‘found’ policyholders without adverse or advantageous CGT consequences to the trustee.
  • It will also provide the same CGT consequences to the found policyholder as if they received the shares, rights or cash directly.
  • Any capital gains arising to the trustee from dealing with the shares, rights or cash should be assessed at the top marginal tax rate.  The trustee will be given the same market value/embedded value cost base (outlined above).

Consultation will be undertaken on the design of these amendments.

In one of the final sessions at the Abacus Convention in Darwin there were 4 presentations by 3 credit unions and a building society of their efforts to engage with their community.

Two of the credit unions cited their objective of creating sustainable communities and describing their credit union as a social enterprise, a profit-making business for a social purpose.

Savings & Loans have a wide range of community programs and partnerships.

mecu have a commitment to the United Nations Environment Programme Finance Initiative and spoke about their work on housing affordability.

Bonus link: The Australian Credit Union Archives

Brandon Khoo, APRA Executive Manager, Specialised Institutions Division addressed the specific issues of the government deposit guarantee and liquidity as well as considering the industry generally and possible fine tuning of Basel II in relation to capital requirements.

He addressed liquidity management in the context of securitisation and the competition for retail deposits and the need for ADI’s to review their business models.

He emphasised the need for ADI strategies to be aligned with the new market realities which meant lower levels of growth.

He said ADI’s needed to focus on:

• impaired loans;
• investment quality;
• interest rate risk;
• managing their margins and profitability.

He warned that the government guarantee helped give confidence against a run on funds but it was not a guarantee against failure.

He also warned that the government RMBS purchase program was a "one-off".

The next 3 years should be used by mutuals to get stronger.

Abacus has announced that the Mutual Banking Code of Practice will be implemented in July 2009.

The previous draft (here) will be amended by including provision for a Code Monitoring Committee. The Constitution and Terms of Reference for the Committee will be released in November. The Committee’s functions will not overlap with the EDR schemes and the Committee will not deal with claims for financial loss.

Day 2  covered funding sources, CEO evaluation and remuneration and a presentation from Dick Ensweiler from the Texas Credit Union League .

The funding session had the background of the deterioration of the securitisation market and looked at deposit retention strategies and a capital program.

The theme of APRA Chair John Laker’s speech at the 2008 Abacus Convention today in Darwin was "do the basics well".

The following quote explains his theme:

"When I addressed this Convention two years ago, I identified the attributes of a strong mutual as strong governance, clear strategy and vision, a skilled management cadre, robust risk management and sound capital management based on sustainable profitability.

The global financial crisis has only reinforced the importance of these attributes. Our experience, in particular, is that strongly governed institutions have coped best with the more difficult operating environment. These are the institutions that have been quickest to identify the scale of emerging problems and adjust their strategic and funding plans, without needing to put the shutters up fully until the storm passed. These institutions have recognised that while sustained good times might have been forgiving of strategic mistakes or risk management weaknesses, the current environment is not.

Hence, my exhortation at the outset for mutuals to keep ‘Doing the Basics Well’.

Maintain your strict credit standards. Husband your retail deposits carefully.

Manage non-performing loans closely. Watch for red ink! Playing to your strengths in this way may not sound as exciting as exploring new territories but you will stand a much greater chance, when new territories do beckon in more settled times, of reaching them intact."