Liquidate or De-Register a Company
Deregistering a company can be a cheap, effective way of winding up a business.
When deregistering a company, there are several income tax issues to consider. Firstly, ensure that there are cash funds available to pay all dividend payments and secondly, ensure there are sufficient franking credits available to avoid the dividends becoming unfranked. Alternatively the company can elect to pay a franking deficit tax.
The Capital Gains Tax (CGT) implication of deregistering a company is another key issue to consider. On cancellation of shares, shareholder interest in the company does provide a CGT Event C2. Various actions can ‘trigger’ various CGT provisions. Event C2 is one such provision. This effectively enables a Capital Gain loss to be calculated. Other issues can also arise when shareholders receive dividends but then realise a capital loss as a consequence of the cancellation of the shares.
Alternatively, when winding up a solvent company you can consider a Members Involuntary Liquidation. Significantly, this provides an alternative scenario in relation to distributions as they are treated as the liquidator’s distributions. In broad terms it allows certain amounts to be distributed as capital instead of dividends for tax purposes and this can deal with pre CGT items or capital gains concessionally treated under Small Business Capital Gains Tax Concessions.
Similar to deregistration, the end result of a liquidation process after any distributions have been made is for the shares to be cancelled. This triggers a CGT Event G1 and/or C1 and these arrangements are concessional and can adjust the cost base of the share.
In conclusion where there are significant CGT issues arising from exempt capital profit reserves, or CGT Concessions available to shareholders, the Members Voluntarily Liquidation is often preferable.
It is most important to have adequate planning to determine the optimum path to follow.
Talk to your Surry Partners for more information.