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LIQUIDATIONS AND TAX CONCESSIONS

Newsletter

by Paul Gidley21.12.15

Member’s voluntary liquidation, or MVL, whereby a solvent company is purposely wound-up, can provide directors or shareholders with a number of benefits including the ability to access any capital gains or realise tax concessions prior to finalising their financial obligations and closing the company.

Company directors or shareholders often decide to dissolve their company when they no longer require it for reasons including:

  • If a company is not operating
  • All tax losses have been fully utilised
  • The desire to distribute capital gains, or
  • To restructure the company’s holding balance sheet.

As noted, this process can afford a company a number of benefits, including the ability to access capital prior to meeting tax obligations.

A MVL can only be conducted on a solvent company, where it is able pay its debts in full within twelve months of the date of winding up. There is the implied perception that if a MVL exceeds the twelve month period, the Company should proceed to a Creditors Voluntary Liquidation.

How it works  

Demand for solvent liquidations by company owners wishing to access CGT business concessions has lead to fewer companies with pre-CGT assets on their balance sheets. Such companies are taking advantage of concessions such as:

  1. 15 year exemption on disposal of active business assets;
  2. 50% reduction on disposable of active business assets;
  3. Retirement exemption;
  4. Rollover into replacement business assets.

In order to take advantage of the above small business CGT concessions, there are some basic conditions that must be satisfied pursuant to section 152 (10) of the income tax assessment act 1999:

  1. A CGT event case 7 happens to a CGT asset;
  2. The above point gives rise to a capital gain;
  3. The tax payer satisfies at least one of the following tests.
    1. Maximum net asset value test in which entities and in filiations cannot exceed 6 million or small business entities as defined in division 328.
  4. The CGT assets must satisfy the active asset test. If the asset has been owned for greater than fifteen (15) years, it must have been active for at least seven and a half (7.5) of those fifteen (15) years;
  5. When the asset is a share in a company or an interest in a trust one of the following conditions must be satisfied just before the CGT event:
    1. The tax payer making the gain must be a CGT concessional stake holder in which it must be a significant individual or a spouse of a significant individual;
    2. The CGT concessions stakeholder must have a small business participation percentage of at least 90%.

The solvent liquidation process allows for the distribution of capital profits to shareholders by taking advantage of favourable tax treatments, below is a summary of the taxable status of distributions when made thorough a solvent winding up:

Distribution
Tax Status
Share Premium Accounts
Tax Free
Return of Share Capital
Tax Free
Retained Earnings
Taxable in the hands of Shareholders, but can be franked to the extent of available franking credits
Capital Profits (post 20 September 1985 asset)
Taxable in the hands of Shareholders, but can be franked to the extent of available franking credits
Capital profits (pre 20 September 1985 asset & shares acquired prior to 20 September 1985)
Tax free in the hands of Shareholders
Capital Profits (post 20 September 1985 but subject to a CGT small business exemption)
Tax Free


In considering the franking credits position of the company, there are a few tax issues that can arise relating to the imputation system, in particular:

  1. Franking credit wastage from poorly times distributions;
  2. Breaching the benchmarking rule; and
  3. Notification requirements where the in trim or final distribution franking levels are reduced.