As outlined in Hayden’s recent article, “Why the 2026 Federal Budget may drive a rise in MVLs”, the removal of the pre-CGT tax exemption from 1 July 2027 is likely to increase the use of Members Voluntary Liquidation (MVL).
The recent legislation changes [1] have further strengthened that expectation.
This article explains how liquidator distributions are treated in an MVL and, through a simplified example, demonstrates how shareholders may access concessional CGT outcomes. It is intended as a general guide for advisers who are less familiar with the taxation of pre-CGT capital gains (also see article) and the small business CGT concessions and should not be relied upon as tax or legal advice.
Small business CGT concessions
Businesses with an aggregated annual turnover of less than $2 million may qualify for small business CGT concessions, including:
These concessions allow eligible taxpayers to reduce, disregard or defer some or all of a capital gain arising from the disposal of an active asset used in carrying on a business. For details, please refer to the ATO’s website.
Tax Benefits of Distributing Capital Gains via MVL
Where a liquidator can clearly identify the source of a company’s funds from its records, those amounts generally retain their character on distribution [2].
This enables shareholders to access concessional tax treatment that would not ordinarily be available if the company simply declared a dividend. Depending on the circumstances, this may include:
pre-CGT capital profits;
the small business CGT concessions; and
other capital amounts distributed by the liquidator.
By contrast, distributions made by directors outside a liquidation are generally treated as dividends under s 47 of the ITAA 1936.
A general summary of the tax treatment if done in via MVL distributions is set out below:
Distribution | Tax Status |
Share Premium Account - capital redemption | Tax Free |
Return of Share Capital | Tax Free |
Capital Profits - Pre CGT asset and the shares in the company were issued / acquired prior to 20 September 1985 | Tax-free; if acquired after that date, generally treated as CGT event C2 proceeds |
Capital Profits - Post CGT asset and subject to CGT Small Business exemptions | Tax-free or concessionally taxed, depending on eligibility |
Retained Earnings | Taxable to shareholders, but may be franked to the extent of available franking credits |
Capital Profits - Post CGT asset | Taxable, but may be franked to the extent of available franking credits |
Work Example
The following simplified example illustrates the potential tax benefits of using an MVL to distribute capital gains to shareholders.
Scenario
Mr A and Mrs A each own 50% of the shares in ABC Pty Ltd. Mr A acquired his shares before 20 September 1985 (e.g. pre-CGT), while Mrs A acquired hers after that date.
ABC Pty Ltd pays tax at 30%, and both shareholders are taxed at the top marginal rate of 45%.
The company is to be wound up and has net assets of $1 million, comprising:
$1,000 share capital
$700,000 pre-CGT capital reserve (from sale of Pre-CGT asset)
$299,000 retained earnings (fully franked)
Distribution by company director
Description | Mr A | Mrs A |
Assessable dividend | 500,000 | 500,000 |
Add: imputation credit | 64,071 | 64,071 |
Taxable Income | 564,071 | 564,071 |
Tax payable@45% | 253,832 | 253,832 |
Less: imputation credit | (64,071) | (64,071) |
Net Tax payable | 189,761 | 189,761 |
Effetive rate of tax on $500,000 distribution | 38.0% | 38.0% |
If the company distributes the funds before liquidation, the entire $1 million is generally treated as dividends. Although shareholders receive imputation (franking) credits for tax already paid by the company, Mr and Mrs A would each incur approximately $189,761 of additional tax, resulting in an effective shareholder tax rate of approximately 38%.
Liquidator’s Distribution
In an MVL, a liquidator’s distribution will look like below:
Distribution | Mr A | Mrs A |
Non-assessable return of capital | 500 | 500 |
Non-assessable dividend - pre-CGT capital profit reserve | 350,000 | 350,000 |
Assessable dividend - retained profits | 149,500 | 149,500 |
Total | 500,000 | 500,000 |
The table below compares the effective tax outcomes under different assumptions.
Assets | Mr A ($) | Mrs A ($) | |
Scenario 1[3] | Scenario 2[3] | ||
Assessable dividend | 149,500 | 149,500 | 149,500 |
Add: imputation credit | 64,071 | 64,071 | 64,071 |
Sub-total | 213,571 | 213,571 | 213,571 |
CGT proceeds for cancellation of shares | 500,000 | 500,000 | 500,000 |
Pre-CGT capital gain disregarded - s104-10(5) | (500,000) | Nil | Nil |
Less: Cost base | N/A | (500) | (500) |
Less: amount otherwise assessable (dividend) | N/A | (149,500) | (149,500) |
Less: 50% general CGT discount[4] | N/A | (175,000) | (175,000) |
Less: 50% small business active asset reduction | N/A | N/A | (87,500) |
Less: retirement exemption | N/A | N/A | (87,500) |
Taxable capital gain | Nil | 175,000 | Nil |
Taxable income | 213,571 | 388,571 | 213,571 |
Tax payable@45% | 96,107 | 174,857 | 96,107 |
Less: imputation credit | (64,071) | (64,071) | (64,071) |
Net Tax payable | 32,036 | 110,786 | 32,036 |
Effective rate of tax on $500,000 distribution | 6.4% | 22.2% | 6.4% |
The example demonstrates that an MVL can substantially reduce the effective tax payable by shareholders where a company has:
pre-CGT capital profits; and/or
capital gains that qualify for the small business CGT concessions.
In appropriate circumstances, preserving the character of capital amounts through an MVL can produce significantly more favourable tax outcomes than distributing the same funds as dividends before liquidation.
Worrells Can Help
At Worrells, we have assisted hundreds of small businesses in assessing the benefits of an MVL. For more information on the MVL process, please contact your local Worrells Principals.
[1] On 25 June 2026, the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 passed both Houses. Among other reforms, it increased the aggregated turnover threshold for the active asset CGT reduction from $2 million to $10 million, significantly expanding access to the small business CGT concessions. As a result, entities with aggregated turnover of less than $10 million that satisfy the remaining eligibility requirements can access the 50 per cent reduction on capital gains from active assets. This concession may apply in addition to the general CGT discount or indexation, where available. The amendment is expected to extend eligibility to more than 98 per cent of active businesses in Australia, enabling a substantially greater number of businesses to benefit from concessional CGT treatment on the disposal of active assets.
[2] These observations have given rise to what is known as the Archer Brothers principle, refer to ATO’s website for further details: https://www.ato.gov.au/law/view/document?docid=TXD/TD9510/NAT/ATO/00001
[3] For demonstration purposes: Scenario 1 assumes that ABC Pty Ltd is not eligible for the small business CGT concessions, whereas Scenario 2 assumes that ABC Pty Ltd is eligible for the 50% active asset reduction and the retirement exemption.
[4] From 1 July 2027, the 50% discount will be replaced with cost base indexation, see https://www.ato.gov.au/about-ato/new-legislation/in-detail/individuals/tax-reform-boosting-home-ownership-reforming-negative-gearing-and-capital-gains-tax
