People often associate the word “liquidation” with insolvency or the failure/collapse of a company. While this may generally be the case, Members Voluntary Liquidations (“MVLs”) relate to the winding up of a solvent entity and fulfil quite an important purpose.
MVLs occur where the company has sufficient assets to pay all its liabilities within a short period (generally less than 12 months). In many MVLs, after the payment of all the company’s liabilities, shareholders (or members) of the company can receive a return. MVLs should not be confused with “deregistration” which we find all too often occurs.
MVLs may also provide a more tax advantageous method for the shareholders or members of a company to receive distributions (particularly in the case of pre-GST assets). MVLs can also fulfil an important role when a key director/shareholder has had a serious illness/death and the business assets need to be realised.
A Liquidator may make two types of distributions to shareholders:
- Income distributions; or
- Capital distributions.
1. Income Distributions
These are essentially distributions to members from profits generated by the company. These payments will be classed as dividends and generally be assessable income in the hands of the members. If the company has paid income tax, a Liquidator may issue “franked” distributions which contain franking credits and allow members to reduce their income tax. Distributions that do not contain franking credits are known as “unfranked”.
2. Capital Distributions
Capital items generally include capital reserves or gains as a result of the sale of capital assets. A capital distribution will also include the return of the initial paid-up capital to the shareholders.
The tax implications of the capital distributions will be dependent on the composition and nature of the capital asset being distributed. For example, where the capital distributions relate to pre-capital gains tax (“CGT”) profits generated by the company, generally any distributions made to shareholders in this regard would be exempt from CGT in the hands of the taxpayer.
Forms of Distributions
A Liquidator is not limited to making cash distributions to shareholders. Distributions can comprise in-specie distributions of the underlying asset to the shareholders in portion to the shareholder’s interests. An in-specie distribution allows the Liquidator to distribute assets to shareholders without converting it to cash and incurring potentially significant costs associated with the sale of assets.
Other Benefits and Taxation Considerations
In addition to the above mentioned advantages, MVLs may provide the following benefits:
- Where shareholders have received loans from the company, a Liquidator can offset amounts previously received by shareholders in calculating the final distribution to the shareholders without the need to physically return the funds to the Liquidator.
- Eligible taxpayers may be able to apply for 50% discount on CGT (if the capital asset has been held for more than twelve months) or small business CGT concessions such as the small business 15 year exemption or retirement exemption.
- Stamp duty concession and exemptions may apply where a Liquidator is distributing assets.
A Liquidator will also provide the shareholders with a distribution statement setting out the composition of the distributions made to assist in the preparation of their tax returns. Notwithstanding, shareholders will need to consider their individual circumstances in determining the tax implications of the distributions. Accordingly, we recommend obtaining professional advice from a tax professional to consider whether MVLs are the most appropriate option.
If you would like to know more about MVLs and how they might be appropriate for you or a client please contact us.