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In the past we’ve talked about winding up the affairs of insolvent companies. But sometimes the directors of a solvent company may decide to wrap up their company because:
- It’s no longer operating and the directors/members have no further use for it
- The ongoing compliance costs of lodging documentation with ASIC need to be reduced
- The shareholders wish to access the company’s equity in a tax-effective manner.
A company remains registered even after it ceases to trade. This means it’s still subject to all the requirements of a registered company, such as lodging and paying annual statements/reviews.
Essentially there are two formal processes for finalising the affairs of a solvent company:
- Deregistration
- Members’ Voluntary Liquidation (MVL).
- Deregistration
In this process, an application is made to the Australian Securities and Investments Commission (ASIC) to have the company removed from the ASIC register of companies. This application can be effectively lodged providing all the following criteria apply:
a. All members of the company agree to the deregistration
b. The company is not carrying on business
c. The company’s assets are worth less than $1000
d. The company has paid all fees and penalties payable under this Act
e. The company has no outstanding liabilities
f. The company is not a party to any legal proceedings.
- Members’ Voluntary Liquidation
While liquidation is usually associated with financial difficulty, it’s not always the case. In the process of Members’ Voluntary Liquidation (MVL), a liquidator is appointed to formally wind up a solvent company.
However, there’s a lot to consider before placing a company into MVL. Every company is different, so each case needs to be individually assessed. There’s no one-size-fits-all solution.
An MVL is commonly carried out when members wish to make tax effective use of the company’s equity. As you can see from this table, the tax office treats distributions made by the company in the ordinary course of business differently to a liquidator’s distribution in a MVL.
| Equity Account | Normal Distribution – Tax Treatment | Liquidator’s Distribution – Tax Treatment |
| Paid up capital | Capital | Capital |
| Retained earnings | Dividend (Revenue) | Dividend (Revenue) |
| Pre-CGT capital profits reserve | Dividend (Revenue) | Capital |
| Post-CGT indexation reserve | Dividend (Revenue) | Dividend (Revenue) |
The benefits in the tax treatment of a capital nature may be:
- That there is either no tax payable on that part of the Liquidator’s distribution,
or
- The shareholder may be able to access various CGT concessions, such as a general 50% discount.
Other benefits of an MVL include:
The cost of the MVL is a tax deduction for members over five years (Section 40-880 of the Income Tax Assessment Act 1997)
- The fact that it is more difficult to reinstate a company which has been degregistered via the MVL process.
There are a couple of downsides of the MVL process:
- It usually takes longer than the deregistration alternative.
- Initially the MVL costs more than applying directly to ASIC for deregistration. However, the potential tax savings from the MVL generally far outweigh this cost.
Which is the best option for you?
When it comes to finalising a solvent company’s affairs, deregistration is quick, easy and cost-effective. However, it’s definitely worth comparing this option to the MVL process. The latter could present members with substantial benefits that would otherwise be lost via the ASIC application process.
The team at Rapsey Griffiths has considerable experience in the MVL process. While we don’t provide tax advice, we do have the most up-to-date precedence and expertise to ensure the MVL process runs smoothly.
If you have a client who could benefit from the Members’ Voluntary Liquidation process, or would like to explore the options to finalise his or her company’s affairs, contact us for an obligation-free consultation.