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Can a friendly society be an ultimate owner described in paragraph 149-15(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) at a particular time if, at that time, members of its benefit funds are entitled to receive benefits pursuant to their policies, which may represent surpluses transferred from the management fund in which capital gains tax (CGT) assets acquired before 20 September 1985 are held?

Yes. The friendly society is able to meet the requirements of an ultimate owner at a time (in this case the end of the test day) provided its constitution prevented it from making any other forms of distributions to members at that time.

A friendly society owns CGT assets that it acquired before 20 September 1985.

The friendly society maintains various benefit funds and a management fund. At the end of a test day prescribed under subsection 149-55(2) of the ITAA 1997, the pre-CGT assets of the friendly society were held in the management fund.

The rules of the management fund and the benefit funds formed part of the friendly society's constitution at the end of the test day.

Each benefit fund had rules dealing with membership of the fund, contributions to the fund and benefits payable from the fund.

The rules for the management fund required that the fund only be appropriated towards the disbursement of expenses and promoting the objects of the friendly society, including the transfer of funds to any of the benefit funds.

The members of the friendly society at the end of the test day were defined in its constitution to include members of benefit funds.

Division 149 of the ITAA 1997 determines when a pre-CGT asset will be taken to be acquired after 19 September 1985. For a public entity, this will occur unless the Commissioner is satisfied, or thinks it reasonable to assume, that at the end of a test day, majority underlying interests in the asset were had by ultimate owners who also had majority underlying interests in the asset at the end of the starting day (sections 149-50, 149-60 and 149-70 of the ITAA 1997).

The term 'ultimate owner' is central to the operation of Division 149 of the ITAA 1997.

Ultimate owner is defined in subsection 149-15(3) of the ITAA 1997 to include companies whose constitutions prevent them from making any form of distribution to their members.

In determining whether a friendly society can satisfy the requirements of an ultimate owner for the purposes of paragraph 149-15(3)(b) of the ITAA 1997, it is necessary to consider the benefits which it provides to members, having regard to its objects and any relevant terms and conditions of membership.

Where a friendly society provides benefits, services and facilities to its members pursuant to the members' policies, such benefits would not be considered distributions of the kind with which paragraph 149-15(3)(b) of the ITAA 1997 is concerned. These benefits are provided in accordance with the terms and conditions of membership agreed to between the company and its members. It is where a member can receive some additional benefit to that which they are entitled under their policy which may cause the company to fail the requirements of an ultimate owner.

In this case, the friendly society's constitution contained various rules governing the operation of the management fund and each of the benefit funds. The benefit fund rules allowed payments to be made from the funds to members of the fund. As the payments represent benefit amounts to which members are entitled to receive under their policy with the friendly society, these payments are not considered to be distributions of the kind with which paragraph 149-15(3)(b) of the ITAA 1997 is concerned.

This is not affected by the friendly society's ability to transfer actuarially determined surpluses of the management fund to any of the benefit funds.

In accordance with APRA Prudential Standards No 2, a friendly society may transfer amounts from a management fund to an approved benefit fund only after obtaining prior written approval from APRA. Consistent with industry practice, such transfers would only take place to provide a capital injection into the fund to ensure its compliance with regulatory capital and solvency requirements. Any surplus transferred from the management fund would only be used to ensure the payment of benefits accrued to members of that fund in accordance with their policy if a benefit fund of the friendly society were to cease operating.

The friendly society therefore can meet the requirements of an ultimate owner for Division 149 of the ITAA 1997 purposes, provided its constitution prevented it from making any other distributions to its members at the end of the test day.