When you decide you no longer require your company and decide to wind it up, you can choose to either deregister the company, or to liquidate it.
A deregistration is the cheapest option and is available to a company with no liabilities and assets under $1,000. Whilst it is the cheapest option, it does not provide any protection from any future litigation, as a creditor can quite easily make a request to ASIC to have a company reinstated, which is a reasonably simple procedure.
The alternative can be either be a Members’ Voluntary Liquidation (for companies that are solvent) or a Creditors’ Voluntary Liquidation (for companies that are insolvent). For companies that are solvent and looking to close down, a Members’ Voluntary Liquidation provides a greater level of protection for the Directors, as it is much more difficult to have a liquidated company reinstated to deal with specific legal issues. This may require application being made to the court and significant evidence shown as to why the company should be reinstated.
A members’ voluntary liquidation (MVLs) is the only way to fully wind up the affairs of a solvent company. All outstanding creditors are paid in full, and any surplus assets are distributed to its members. A members’ voluntary winding up also protects the members’ interests while the company structure is dismantled.
MVLs can also create some great tax outcomes, enabling shareholders to release retained earnings in the company via methods that utilise Capital Gains Tax concessions that would not have been available if the funds were released prior to liquidation.
Outside of liquidation, these distributions will be fully taxable to members as dividends. However, a liquidator’s distribution is not subject to the ordinary tax provisions dealing with dividends. A liquidator’s distribution is dealt with under specific income tax provisions and the capital gains tax regime. In some circumstances this distinction will provide definite tax advantages for members. Two common situations where members may benefit on liquidation are:
- Shares acquired before 20 September 1985. The principal benefit arises where the company has gains that were realised on the disposal of pre‐CGT assets (ie assets acquired before 20 September 1985). Such gains can be distributed to the relevant members’ tax free, via liquidation.
- A company which has utilised the small business CGT concessions. Often the sale of the business assets may qualify for a 50% CGT exemption if certain criteria are satisfied. If this tax‐free gain is distributed to members in the ordinary course, then it will be fully assessable as a dividend. By contrast, a liquidator is able to preserve a significant proportion of this tax concession for the benefit of members.
Corporate Closure Pty Ltd was incorporated in 1982 with $2 in share capital. Ben and Sarah were allotted one share each which they continue to hold. Ben and Sarah lent $200,000 to the company to acquire a property in 1983. This property was sold recently for $700,000 realising a tax‐free capital gain of $500,000. The company has approximately $500,000 in the bank after repaying the debt to member. Ben and Sarah wish to wind‐up the company.
Option 1‐ Deregistration
The company would need to distribute the cash to Ben and Sarah prior to deregistration. All but $2 of this amount will be assessable as an unfranked dividend. A dividend of $500,000 will be liable for tax of up to $245,000 based on the top marginal tax rate of 49%.
Option 2 – Liquidation
The capital gain may be distributed tax‐free to Ben and Sarah.
If you would like to know more about the Members Voluntary Liquidation process or to find out if this is an appropriate way to wind up your company we invite you to speak with James Brown our Corporate Insolvency specialist.
Contact us on 1300 667 897 to book your free consultation today.