As a result of the current harsh economic climate there has been a notable increase in the amount of businesses, and consequently business owners, that are having to reconsider the way in which the business is currently operating. Unfortunately, for many small to medium enterprise operators they are having to reassess whether or not it is financially viable for the business to continue functioning at all.
There are various options for a business that finds it is no longer able to trade such as Members’ Voluntary Liquidation or deregistration. The best option for each individual situation is different, which is why it is important to note that choosing the wrong method could prove to be a costly decision. Making the correct choice is not only important in terms of the initial monetary cost to the business but also in relation to the tax implications of each.
Members’ Voluntary Liquidation refers the process of winding up a solvent company. This means that the business is in a financial situation where it is able to pay its debts if and when they are due prior to the execution of the liquidation process.
Deregistration is the formal process of removing a company from the Australian Securities and Investments Commission (ASIC) register of companies. The removal usually takes place following the completion of Members’ Voluntary Liquidation. However, provided that the following conditions are met a company can be deregistered without first going through the liquidation process.
- all company members agree to the deregistration
- the company is not carrying on business
- its assets are worth less than $1000
- all company fees and penalties payable under the Corporations Act have been paid
- there are no outstanding liabilities, and
- the company is not a party to any legal proceeding
then deregistration can take place.
Whilst from a cost-to-the-business perspective Member’s Voluntary Liquidation is more expensive, when viewed from a taxation perspective there are many benefits, particularly to the shareholder, when using the Members’ Voluntary Liquidation method.
For example, the winding up of a company will no doubt result in the necessary distribution of its accumulated profits and capital reserves to the company’s shareholders. If the distribution of the assets is done via a liquidator there are specific tax provisions and capital gains tax regimes that are applied, proving advantageous for the shareholders. Conversely, if the assets are distributed without the use of a liquidator the usual tax provisions in relation to shareholder dividends apply.
The basic application of this can be demonstrated using the following simplified example.
Holiday Getaway Pty Ltd was incorporated in 1984 with $100 in share capital. The shareholders, Sally and Alex were allotted 50 shares each. In the same year Sally and Alex lent $500,000 to the company in order for it to purchase a property. Years later, property was sold for $950,000. This is a capital-gain of $450,000 for the company. After repaying all of its debts the company has approximately $400,000 in the bank at the time that Sally and Alex decide to wind-up the company.
Using the deregistration option, Holiday Getaway Pty Ltd are required to distribute the remaining cash to Sally and Alex before deregistration can occur. Apart from the initial $100 that was invested in the company, the rest of the cash is considered an unfranked dividend and will be taxed as such. Based on the top marginal tax rate of 45% there will be $179,955 owed in tax on the remaining $399,900.
If Holiday Getaway Pty Ltd elects to undertake the process of Members’ Voluntary Liquidation the distribution of assets will be tax-free to Sally and Alex.
As demonstrated in the above example there can potentially be significant tax benefits to the shareholders of a company if Members’ Voluntary Liquidation is implemented. However this may not be the optimal outcome for every situation. It is also necessary to consider the administration, legal and other costs associated with this process. This is why it is increasingly important that you seek the advice of professional accountants and lawyers when considering winding-up your company.
At The Quinn Group we have a team of highly qualified lawyers and accountants who will be able to advise you on the best method for your situation. If you require advice on the winding-up of your company or would like more information please contact us on 1300 QUINNS or submit an online enquiry form.