Common tax strategies for a solvent winding up.
Liquidation is a process to formally wind up a company’s affairs. This can occur by way of solvent as well as insolvent liquidations. A solvent members’ voluntary liquidation occurs when a company has approached the end of its useful life and its affairs needs to be formally wound up and it has sufficient assets to pay out all of its creditors. Companies can also be voluntarily deregistered without a formal liquidation process if the relevant criteria are met. However, a solvent members’ voluntary liquidation can give several potential benefits including tax benefits.
The main benefit arises from a liquidator’s distribution to shareholders of any remaining assets in the company. The Archer Brothers Principle arose from Archer Bros Pty Ltd (In Vol Liq) v FCT (1952-53) 90 CLR 140 which is set out as follows:
“By a proper system of book-keeping the liquidator, in the same way as the accountant of a private company which is a going concern, could so keep his accounts that these distributions could be made wholly and exclusively out of those particular profits or income…”
Generally, where the liquidator can accurately determine the origin of the funds (from the company records and other information) that the distribution is made from: those distributed assets maintains its character for the purposes of any amount distributed (TD 95/10 and section 47 of the Income Tax Assessment Act 1936).
The most common scenarios where a potential benefit is available is where the company is carrying profits from a pre-capital gains tax (CGT) asset realisation or profits where the small business CGT concessions are available. If an ordinary distribution was made in these scenarios, the dividends would be taxed as ordinary dividend income of the shareholder which is likely to result in potentially large and unnecessary tax liabilities for those shareholders. Whereas, if the profits in the company were distributed as a liquidator’s distribution, the distributed funds retain the character of the profit or income it was derived from and can be treated and taxed in the hands of the shareholder accordingly.
As a basic example, if the liquidator’s distribution was made solely from profits realised from a pre-CGT property, the distribution would retain its CGT exempt status in the hands of the shareholder as opposed to being taxed as ordinary income if it were distributed as an ordinary dividend. This can of course result in substantial tax savings to the shareholder. The liquidator’s distribution statements will reflect the composition and appropriate proportionate amounts of the derived profit or income that the individual shareholder receives.
It is not necessary to be a registered liquidator to act as a liquidator of a members’ voluntary liquidation. However, recent changes following the introduction of the Insolvency Law Reform Act 2016 have added extra levels of complexity to the winding up process, including statutory reporting and lodgement obligations in certain circumstances. Therefore, we recommend that anybody requiring assistance in this area contact our offices to discuss the matter further.
The above is provided for general information purposes only. Eligibility criteria and certain conditions must be met to qualify for any potential tax benefits. We are the experts in the liquidation aspects of company winding ups, we will leave the tax advisory aspects to the experts in that field. We recommend that individuals first obtain specialised tax advice for their specific circumstances before proceeding with any liquidation appointment.