Managing risk and avoiding future tax issues
What is Voluntary Deregistration?
A company can apply to the ASIC to be deregistered using Form 6010. To be eligible to voluntarily deregistered a company, it must have ceased to trade, have no debts, and assets of less than $1,000.
What is a Members’ Voluntary Liquidation (MVL)?
A Member’s Voluntary Liquidation is a process to formally wind up a solvent company. A solvent company is a company where its assets exceed its liabilities. This process involves the shareholders passing a resolution for the appointment of a liquidator. The liquidator then attends to winding up the affairs of the Company, realising any assets, and distributing those assets to members.
One of the key aspects of an MVL is that the liquidation must obtain a tax clearance certificate from the Australian Tax Office (ATO) prior to distributing the Company’s assets. A tax clearance certificate is confirmation from the ATO that the Company’s tax affairs are complete, and the certificate will specify any amount that needs to be paid to the ATO to fully discharge the Company’s tax obligation. Once a tax clearance certificate has been issued, it can be relied upon as a final determination of the Company’s tax obligations.
The Risk of Voluntary Deregistration
Where a company has no assets or liabilities, it can be tempting to take the lower cost option of applying to the ASIC for the Company to be deregistered. However, this approach comes with a risk that the ATO later assesses a tax debt against the Company and pursues that debt.
Often when seeking tax clearance on an MVL, the ATO will identify historical debts or returns that the directors of the Company were not aware of. The MVL process allows the Company to identify and deal with these historical tax issues, the Voluntary Deregistration process does not, meaning these risks remain open indefinitely.
A case we recently dealt with involved a deregistered company that had not fully complied with its superannuation obligations. The ATO conducted an assessment and raised a debt against the deregistered company that the ATO then proceeded to pursue.
Can the ATO issue a Director Penalty Notice (DPN) for a deregistered company?
The short answer is: Yes. The ATO can issue a DPN to a director of a company if that company has unpaid PAYG withholding, SGC liabilities, GST, LCT, and WET liabilities. A company being deregistered does not prevent the ATO from issuing a DPN.
What happens when the ATO issues a DPN to a director of a deregistered company?
We have had a number of instances over the last 12 months where we have been approached by a former company director about a DPN they received from the ATO in relation to a deregistered company. However, at the time of voluntary deregistration, the company had either unknown, or unquantified taxation debts.
If this company had instead been wound up via an MVL, these tax debts would have been identified when seeking tax clearance and could have been dealt with efficiently at that time, reducing or eliminating the DPN risk (depending on when returns are lodged).
Receiving a DPN once a company is deregistered can be very expensive to deal with, often requiring an urgent application to the court to reinstate the company to deal with the DPN.
MVLs provide certainty
While more expensive than applying to the ASIC for voluntary registration, a MVL is a relatively inexpensive process that minimises risk and provides peace of mind when bringing a company to a close. The MVL process is especially valuable for companies that have traded for a lengthy period of time, or that had large or complex operations. This is due to the fact that tax debts never expire and possibly may come back to haunt a company and its directors over a long time. In one case, we had to deal with a debt from 1956!
If you’re seeking clarification on whether a members' voluntary liquidation or a voluntary deregistration is the right solution for your business, we invite you to have a private and confidential discussion with your local Worrells principal. We can assess your business, situation, and point you in the right direction – free of charge, with no obligations.
