Steven Priest
Chamberlains SBR, Chartered
Accountants
Wagga / Dubbo / Shepparton
Members Voluntary
Liquidations
Primary Objective of a Members Voluntary Liquidation
• To have company deregistered
Why deregister?
• Company has ceased trading
• No further use for the company
• While registered the company continues to be subject
to requirements of registered company eg ASIC
annual review fees
• Company ceases to exist on deregistration.
How do we deregister a company?
Two ways in which it can be achieved: • Application to ASIC to have company
deregistered (must meet certain legal
requirements)
• Members Voluntary Liquidation
Winding up a Company under a
Members Voluntary Liquidation
• Only for solvent companies
• Not an insolvency appointment (appointed Liquidator
does not have to be ASIC Registered Liquidator)
• When useful
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–
–
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reconstructions
when company not needed
alternative to deregistration
provides shareholders with method of exiting and realizing
the distributable value of assets, i.e. pre 20 September
1985 capital gains out of company tax free.
– Members can choose Liquidator
Basic Process of a MVL
1. Directors Meeting
– Declaration of Solvency
• Completed by majority of directors
• Company is able to pay all its debts in full within 12
months
• Should be reflection of company position at that time
• Not made earlier than 5 weeks before winding up
resolution passed
• Lodged with ASIC prior to notice sent to convene
members meeting
2. Members Meeting
– 21 days notice for proprietary company (ability
to hold earlier)
– Must pass special resolution to wind up
company (75% in favour)
– Pass ordinary resolutions
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Appointment of Liquidator(s)
Fixed Liquidator(s) remuneration
Destruction of Books & Records
How distribution of surplus assets are to occur
3. Liquidator Procedures
– Advertise notice of resolution within 21 days
– Lodge appropriate ASIC documentation
– Apply to ATO for tax clearance
– Deal with creditor claims
– Realise assets
– Make distributions to members
Liquidator Procedures (continued)
– Convene final meeting of members, lodge final
ASIC document
– Company will be deregistered 3 months from final
meeting
– If at any time liquidator forms opinion company
not able to pay its debts within 12 months
• Apply to Court
• Appoint voluntary administrator
• Convene meeting of creditors to proceed with CVL
Keys to an efficient liquidation
• Good company secretarial files
• History of Shares
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Shareholdings
Classes
Issues
Transfers
• Classification of Reserves, Retained Profits and
Capital
• Clean Company Balance Sheet
Distribution of Assets
Type of Distributions
Tax Status
Retained Earnings (including revenue
reserves)
Taxable, but will be franked to the
extent available in the franking
account
Not a deemed dividend
Pre CGT Capital Profits
Post CGT Capital Profits
Share Premium Account
Taxable, but will be franked to the
extent available in the franking
account
Not a deemed dividend
Share Capital
Not a deemed dividend
Distribution of Assets
• Assets should consist of cash or loans to
shareholders (Div 7A)
• Franking credits are available to liquidator
when distributing dividends
• Necessary to consider changes in company
shareholders
• It is also necessary to consider CGT
implications of changes in assets.
Examples of Tax Issues in Liquidations
One key to minimising tax implications is to
having clear definitions of what is pre and post
CGT reserves.
• Appropriate Record Keeping
Example 1
• Peter and Phil acquired all shares in Fine Flowers Pty Ltd in
January 1985 for $120,000. On 1 July 2009 both Peter &
Phil decide to place the company into liquidation.
• Other factors
– Paid up capital was $100,000
– Pre CGT asset was sold in 1997 for a capital profit of $50,000
– In 1999 the company sold for $150,000 an asset acquired 14
months earlier for $90,000
– In 1999 the company incurred a capital loss of $20,000 on the
sale of a post CGT asset
– Accumulated profits total $140,000
Shareholders Funds
Paid Up Capital
Capital Profits Reserves
(Pre)
Capital Profits Reserves
(Post)
Capital Profits Reserves (All)
Approach 1
(Good Records)
$100,000
Approach 2
(Poor Records)
$100,000
$50,000
$60,000
-
$90,000
Capital Losses
($20,000)
Retained Profits
$140,000
$140,000
Net Assets
$330,000
$330,000
Relevant Case Law
Archer Brothers Pty Ltd v FCT (1953)
• Principle established was that decision allows liquidator to
determine the order in which distributions are made.
Rules for “Archer Bros” principle to apply
• The company accounts must be kept in a way that allows
the liquidator to clearly indentify a specific profit or fund in
making the distribution
• The liquidator must actually appropriate the specific profit
or fund in making the distribution either in the accounts or
in the statement of distribution (TD 95/10)
Distribution of Funds
Paid Up Capital
Capital Profits Reserves
(Pre)
Capital Profits Reserves
(Post)
Capital Profits Reserves (All)
Approach 1
(Good Records)
$100,000 (non-taxable)
Approach 2
(Poor Records)
$100,000 (non-taxable)
$50,000 (non-taxable)
$40,000 (taxable)
-
$90,000 (taxable)
Capital Losses
-
Retained Profits
$140,000 (taxable)
$140,000 (taxable)
Total Distribution
$330,000
$330,000
$150,000 (non-taxable)
$100,000 (non-taxable)
$180,000 (taxable)
$230,000 (taxable)
Summary
Summary
• Where pre & post gains are mingled into one account
they may lose their distinct identities if insufficient
records are maintained. If liquidator can not establish
any part of distribution is pre CGT gain, the full amount
will be treated as a dividend pursuant s 47(1)
• ATO does not consider it necessary to keep separate
accounts for each specific fund or profit, although
maintenance of separate accounts makes it easier to
identify the source of a distribution
Examples of Tax Issues in Liquidations
Second key to minimising tax implications is to
have a thorough pre-liquidation review.
• Application of Income to Replace Paid Up
Capital
Example 2
Assets
Cash on Hand
100
Equity
Paid Up Capital
150
Accumulated Losses
(100)
Capital Profit Reserve
50
Total
100
Can it be assumed the $100 could be distributed as Paid Up Capital? No
The Courts and the Tax Commissioner consider the accumulated losses
have diminished the paid up capital
Relevant Case Law
Glenville Pastoral Co. Pty Ltd (In Liq) v FCT (1963)
• Principle established was that the application of
income to a loss of paid up capital must be made prior
to liquidation.
Rules for “Glenville” principle to apply
• Authority for replacement of a loss of paid up capital
may only be made by directors of company
• The liquidator cannot capitalise profits in this manner
Distribution of Funds
Paid Up Capital
Capital Profits Reserves
(Post)
Accumulated Losses
Total Distribution
Summary
Approach 1
(Directors authority)
Approach 2
(No authority)
$100 (non-taxable)
$50 (non-taxable)
-
$50 (taxable)
-
-
$100
$100
$100 (non-taxable)
$50 (non-taxable)
$0 (taxable)
$50 (taxable)
Summary
• To avoid this issue prior to liquidation the
directors should pass a resolution in regard to
application of income to replace paid up
capital.
Options when errors are made?
• Failing to identify a liability
– During Liquidation
• Sufficient assets liquidator can pay
• Insufficient assets
– parent make good
– place into CVL
– After final distribution
• Creditor claim extinguished
• No sustainable claim without leave of court
Options when errors are made?
• Fail to identify an asset
– During Liquidation
• Liquidator sell & distribute
• Remove company from liquidation
– After final distribution
• Application to reinstate company
• ASIC may execute transfer documents
Options when errors are made?
• Fail to identify tax issues
– During liquidation
• Shareholders exposed to payment of tax
• Finalisation of liquidation will take additional time