RSM Business Protect Series – Do you need to wind up a solvent company?

RSM’s Restructuring & Recovery team at Port Macquarie on the mid-north coast of NSW is seeing an increase in enquiries from members/shareholders seeking to minimise their tax burden, or safely bring their company to an end via a Members’ Voluntary Liquidation process.

A Members’ Voluntary Liquidation Process is also commonly referred to as a “good” or “solvent” liquidation process to differentiate it from a Creditors’ Voluntary or Court Liquidation process.

Generally, a Creditors' Voluntary or Court Liquidation process involves a company that is insolvent (i.e. unable to pay its debts as and when they fall due).

Why use a Members’ Voluntary Liquidation Process?

Tim Gumbleton, Principal of RSM on the mid-north Coast of NSW, notes the reasons for utilising a Members’ Voluntary Liquidation process to wind up a solvent company can include:  

• The company has outlived its useful life and no longer suits a succession plan;
• To utilise the Liquidator’s distribution of paid-up share capital and pre-capital gains tax (‘CGT’) capital reserves to minimise tax;
• The members/shareholders are seeking to crystallise/unlock the value of their shares in the company for various reasons including deceased estates, shareholder disputes, cessation of trading, etc;
• To appoint an independent person, the Liquidator, to appropriately wind down operations and other outstanding matters in a structured, safe, and compliant process thus ensuring there are no legacy issues for future resolution such as insurance claims, creditor issues, statutory claims, etc.
• The members/shareholders are seeking a simplified structure thus reducing compliance costs and time requirements i.e. corporate simplification and restructuring requirements;
• Succession and estate planning; or
• In certain amalgamation and merger scenarios including for not-for-profits where a shell of the company remains following the transition process.

Key Advantages of a Members’ Voluntary Liquidation

The key advantages of a Members’ Voluntary Liquidation process can include:

• Distributions being treated as capital in nature with the use of franking credits remaining available for profits;
• Any residual creditors or other liabilities will be identified and resolved by an independent party being the Liquidator;
• Statutory clearance is provided by the Australian Taxation Office; and
• The company is ultimately deregistered and struck off the corporate register.

Outside of a Members’ Voluntary Liquidation process, the distribution of CGT and other reserves can have significant tax implications compared to the treatment of distributions by a Liquidator.

The choice to wind up a company is determined by factors including the nature of the remaining assets and reserves, the level of pre-CGT and post-CGT reserves, share capital, and various duties and other statutory factors.

A Members’ Voluntary Liquidation is the most tax effective way to close down a company with pre-CGT profits, noting the various small business CGT concessions and in-specie distribution options.

It can be helpful for members/shareholders across a range of scenarios, also noting the utilisation of reserves on Government support such as cash flow boost. Cash flow boost is non-assessable non-exempt income (NANE income) and is also treated as capital in nature in a liquidation scenario.  

Is Voluntary Deregistration by ASIC a viable alternative?

As an alternative, a voluntary ASIC deregistration process may be appropriate when a company ceases to carry on business, has no liabilities, and has assets of less than $1,000.

Deregistration is a relatively quick and cost-effective process and once deregistered there are no further annual compliance costs.

However, if there are potential risks or future claims or if a company has untaxed capital profits or reserves, then an ASIC deregistration will not be the most appropriate option.

How We Can Help

Our range of Members’ Voluntary Liquidation services are designed with members and shareholders in mind. We work with small proprietary companies through to large corporate groups.

We consider it important to undertake due diligence to identify the risk of claims arising to ensure a successful Members’ Voluntary Liquidation or corporate wind-up process.

Our Liquidators work with our clients and their existing advisors to consider the best way to achieve the objectives and implement the liquidation plan in the most efficient manner.

Preparation and planning are critical including considering in advance any tax implications and the appropriate timing for the Members’ Voluntary Liquidation process to begin.

We can utilise our high-level tax support team if the issues identified require a deeper dive to fully understand the treatment of the required liquidator’s distributions.

About the Writer

Tim Gumbleton, with over 25 years of commercial experience, and RSM Australia are the mid-north coast’s Members’ Voluntary Liquidation, business improvement, corporate turnaround, dispute resolution, insolvency, restructuring, asset protection, forensic accounting, liquidation, and bankruptcy specialists.

About RSM – Our Point of Difference

RSM is a full-service national accounting, consulting, and advisory firm operating from over 30 offices throughout Regional and Metropolitan Australia.   

We are uniquely placed given our regional expertise, footprint, and extensive national coverage backed by international reach and scale.

RSM can help you and your business, no matter where you may be based.

For more information

For more information on resolving disputes, please contact Tim Gumbleton or your local RSM office.