Understand the tax on winding up a solvent company
We will tell you how the surplus will be taxed before the liquidator distributes it.A solvent company being wound up usually has money to give back. How that money is taxed depends on what it is made of and how it leaves the company. The same dollar can be a dividend at your marginal rate, or a capital distribution eligible for the capital gains discount. A members voluntary liquidation under the Corporations Act 2001 (Cth) (the Corporations Act) opens up treatment that a simple deregistration does not. It also has to be set up before the liquidator starts distributing.
Capital treatment where it is available
A liquidator's distribution can be capital rather than a dividend, which changes the rate that applies.
Every shareholder modelled separately
Shareholders sit on different marginal rates, so the best answer for one is not the best for all.
Division 7A dealt with first
Shareholder loans are resolved while the company still has the franking credits and cash to do it.
What is a members voluntary liquidation, and why does the tax differ?
A members voluntary liquidation is the formal winding up of a company that can pay its debts in full. The directors make a declaration of solvency, a liquidator is appointed, the assets are realised and the surplus goes to shareholders. The tax significance lies in how those distributions are characterised. Amounts paid by a liquidator can be treated as capital rather than as dividends, which brings the capital gains rules and their concessions into play.
Is a members voluntary liquidation better than just deregistering?
Usually, where there is a meaningful surplus. A liquidator’s distribution can be treated as capital, which opens up the capital gains discount and the small business concessions. A simple deregistration generally does not. There is a cost to appointing a liquidator, so the answer depends on the size of the surplus.
What happens to a loan I owe the company?
It has to be dealt with before the wind up, not during it. An unpaid shareholder loan that is not on complying terms can be treated as an unfranked dividend. Resolving it while the company still has cash and franking credits is far cheaper than dealing with it afterwards.
Can the small business CGT concessions apply on a wind up?
They can, where the shareholder and the company meet the conditions. The tests look at the net value of connected entities and whether the shares were in an active business. The conditions are assessed at the time of the distribution, so eligibility should be confirmed before the liquidator starts.
Do we need a liquidator, or can our accountant do it?
A members voluntary liquidation requires a registered liquidator to be appointed. Your accountant will usually prepare the financial statements and the final returns. We advise on how the distributions will be taxed and on the order of the steps, which is decided before the appointment.
Model the distributions before the liquidator is appointed
Send us the balance sheet and the shareholder details. We will model what each distribution would be taxed as, and tell you what to fix first.
The same surplus, taxed two very different ways
You are closing a company that has done well, and there is a surplus to return to shareholders. What you may not know is that the tax on that surplus is not fixed. It depends on the composition of the reserves, the order of the steps, and whether a liquidator makes the distribution. Get the sequence wrong and an amount that could have been capital is assessed as an unfranked dividend.
- We will analyse the composition of the company's reserves and paid up capital.
- We will model each distribution and tell you how it would be assessed for every shareholder.
- We will identify whether capital treatment or the small business concessions apply.
- We will deal with any Division 7A loans before the liquidator is appointed.
- We will set out the order in which the steps should happen, and why.
The company has finished trading and the shareholders want their money
The business has been sold or has run its course, the debts are paid, and what is left is cash and retained profits. The shareholders are often family, at different stages of life and on different marginal rates. Somebody has suggested simply deregistering the company and paying the money out. You want to know whether that is the cheapest way to do it, and it usually is not.
What's included in your MVL tax advice
- Analysis of paid up capital, pre-CGT reserves and retained profits.
- Shareholder by shareholder modelling of each proposed distribution.
- Capital gains discount and small business concession eligibility.
- Division 7A review and remediation of shareholder loans.
- Franking account review and dividend planning.
- A written sequence of steps for the wind up.
Where the surplus gets taxed twice as hard
A company wound up without tax advice usually still gets wound up. The shareholders just receive less.
The most common loss is characterisation. Distributions made before a liquidator is appointed are generally dividends, taxed at each shareholder’s marginal rate with whatever franking is available. Distributions made by a liquidator can access capital treatment, and with it the capital gains discount and the small business concessions. On a substantial surplus the difference is large.
The second loss is Division 7A. Shareholder loans that were never repaid or put on complying terms do not disappear when the company does. They can be treated as unfranked dividends at exactly the moment the company has no franking credits or cash left to help. Both problems are fixable, and both have to be fixed before the winding up starts.
From a surplus on the balance sheet to a distribution you have planned
We start with what the surplus is actually made of. Paid up capital, pre-CGT reserves, post-CGT profits and retained earnings are each treated differently on distribution, and the mix determines the outcome.
Then we model the distributions. That means working out, shareholder by shareholder, what each would receive and how it would be assessed. Where the small business capital gains concessions or the capital gains discount are available, we confirm the conditions can be met. We also deal with any shareholder loans before the liquidator is appointed. Division 7A is far cheaper to resolve while the company still has options.
How we plan the tax on your wind up
Work out what the surplus is made of, then decide how it should leave.Open the balance sheet
We work out what the surplus is made of, because paid up capital, pre-CGT reserves and profits are treated differently.
Model the distributions
We calculate what each shareholder would receive, and how it would be taxed under each available route.
Clear the ground first
We resolve shareholder loans and franking issues before the liquidator is appointed, while there are still options.
The surplus modelled before anything is distributed
Closing a company you built is a decision people arrive at slowly, and by the time it is made most owners just want it finished. It is a bad moment to discover the tax could have been half as much.
One of our lawyers is a Chartered Tax Advisor with The Tax Institute and has held that credential for 25 years. We are also recognised in Doyle’s Guide for tax law. One of our lawyers also holds the ARITA Advanced Certificate in Insolvency and is a member of the Australian Restructuring Insolvency and Turnaround Association. We model members voluntary liquidations shareholder by shareholder, and we work alongside your accountant and the liquidator rather than duplicating them.
Our great lawyer guarantee
Six principles we hold to, whatever you bring us and however long it takes.
Take the time
We listen carefully to understand what you want to achieve, then step you through the advice and the documents.
Share our knowledge
We pass on as much as we can, so you can make your own informed decisions.
Stick to our knitting
We only do what we are good at, so you never pay for our learning.
Work as one team
Someone is always available to answer your question or point you the right way.
Fair pricing
A fixed or capped quote for advice and documents, so you do not carry the price risk.
It is your show
We are in it for a front row seat to witness your success, not for our egos.
Find out what the surplus will actually be worth
Send us the balance sheet, the share register and details of any shareholder loans. We will model the distributions and tell you what should happen before a liquidator is appointed.
More on this area of law
Read more about members voluntary liquidations, company wind ups and Division 7A, and how ADLV Law can help.
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