Member voluntary liquidations can yield numerous tax advantages
Members’ Voluntary Liquidations, or MVLs as they are commonly known, are solvent “winding-ups” that can provide shareholders with a number of benefits, including the ability to access assets by taking advantage of capital gains tax (CGT) concessions prior to closing the company.
As attractive as these benefits are, it’s worth noting that this process can only be conducted on solvent companies capable of paying their debts within twelve months of the winding-up date. Should the company fail to meet this requirement, they should proceed to a creditors’ voluntary liquidation.
Not surprisingly, demand for solvent liquidations by company owners wishing to access CGT concessions, has led to fewer companies with pre-CGT assets on their balance sheets. As a result, shareholders are now taking advantage of small business CGT concessions such as:
• the 15 year exemption on the disposal of active business assets, or
• a 50% reduction on the disposal of active business assets, or
• the retirement exemption, or
• the ability to apply the GCT rollover concession.
To take advantage of the above concessions, there are some basic conditions that must be met:
1. A CGT event happens to a CGT asset (with the exception of a K7 event)
2. The CGT event must give rise to a capital gain
3. The tax payer must either be a small business entity or satisfy the maximum net asset value test
4. The CGT asset must satisfy the active asset test
5. When the asset is a share in a company or an interest in a trust, either the tax payer making the gain must be a CGT concessional stakeholder or the CGT concession stakeholder must have a small business participation percentage of at least 90%.
The extent of these favourable tax treatments can vary depending on the asset and the shareholder. A summary of the usual taxable status of distributions are summarised as follows:
Directors/shareholders seeking to undergo an MVL must investigate all taxation considerations, including understanding the franking credit position of the company. A few taxation traps relating to the imputation system exist and include the following:
• Franking credits can be wasted from poorly timed distributions,
• The “benchmarking rule” can be breached, and
• Lack of understanding the notification requirements where the final distribution franking levels are reduced.
Given the many taxation benefits that can be realised by voluntarily winding up a solvent company that is no longer required, it’s worth investigating how best to structure this process to realise the greatest gain (and ensure all regulations and requirements are met).
It is important to remember that the MVL process can also be conducted on associations, co-operatives and companies limited by guarantees.
The numerous requirements and varying degrees of concessions that exist can make this a complex operation. To be confident you’re taking the right steps, it’s worth talking to an insolvency professional.