Members’ Voluntary Liquidations

Should you be facing the prospect of winding down your company, there are several factors to consider.

A company which is no longer required and has assets of less than $1,000 and no liabilities may simply be deregistered by making the appropriate application to the Australian Securities and Investments Commission.

If, however your company has assets of greater than $1,000, these may be realised to extinguish any liabilities and the surplus may be distributed amongst its members. In some circumstances however, there will be taxation advantages to winding up the company as a ‘members’ voluntary liquidation’ and have the Liquidator distribute the surplus.

Any distribution made to shareholders from a company not in liquidation will be considered a dividend for taxation purposes. Whether revenue or capital, these distributions will be considered part of the company’s profits.

When a company is in liquidation however, any dividend distribution must be paid out of reserves that were previously income. Any distribution such as a ‘disregarded capital gain’ under these circumstances will not be considered as a dividend because it is not income.

There are a limited number of disregarded capital gains to be found within the income tax legislation. They include:

• Gains derived from the disposal of assets acquired pre 20 September 1985
• Small business CGT concessions including the small business 50 per cent reduction.

Another important factor to consider when liquidating your business involves analysing the capital gains tax status of the company’s shares and whether they are pre or post CGT assets.

In the case of a final Liquidator’s distribution, or an interim distribution which is followed within 18 months by the dissolution of the company, the distribution by the Liquidator of the ‘exempt’ small business 50 per cent component represents capital proceeds for the cancellation of the shares.

In the case of post CGT shares, it is possible for shares in a company to be an active asset under the small business CGT concessions. It is therefore possible that upon liquidation of the company, a shareholder may be entitled to claim the general 50 per cent CGT discount together with the small business CGT concessions.

For more information regarding how to best wind up your company talk to your Chartered Accountant.