A Members’ Voluntary Liquidation (MVL) is a formal process of winding up the affairs of a solvent company. The members of the company, via a special resolution, decide to wind up the company, which must have sufficient assets to settle all its debts. Any remaining assets post this settlement are proportionately returned to shareholders.
The available taxation benefits are generally a large driver, particularly the company has derived a mixture of retained earnings and capital profits that are being returned to shareholders, even more so if those capital profits were derived pre-CGT.
Tax Benefits of MVL:
Where a company returns capital to shareholders outside of a MVL scenario, generally any amounts returned over the company’s paid up share capital (i.e. the amount paid to the company to issue new shares) is taxed as a dividend. However, distributions made during an MVL have specific tax advantages, which may include the following:
- Capital Gains Tax (CGT) Exemptions: Provided appropriate accounting records are kept, pre-CGT gains or assets can be distributed tax free to the shareholder. If related to post-CGT, shareholders could potentially claim the 50% General CGT Discount. It is also possible for the Small Business CGT Concessions to apply.
- Franked Dividends: Where imputation credits remain, they can be allocated against the distribution of Retained Earnings distributed by a liquidator (based on the amount that is not tax free to the shareholder under the other concessions, and is instead taxed as dividend to the shareholder).
- Division 7A Loans: Shareholder loans under this division can be settled through the liquidation process, providing additional relief.
- Share Capital Returned: Paid up capital distributed as return of capital, therefore tax free to the shareholder.
General Benefits:
- Once liquidated and deregistered via a MVL, there are limited recourses to anyone who may have been a contingent creditor against the company in the future. All claims would need to have crystalised and lodged with the liquidator prior to the finalisation of the liquidation.
- It’s crucial to differentiate between an MVL and a mere voluntary ‘deregistration’ of a company. Voluntary deregistration is a simpler process, but deregistration requires (amongst other things) that the company has assets worth less than $1,000 (which necessitates the company returning any surplus to shareholders in a way that does not have the advantages of a MVL) and that the company as no liabilities. If a company is deregistered (as opposed to being placed into MVL), a creditor can apply to reinstate the company in the future to bring claims against the company (and potentially its directors), such as where the company had unknown liabilities at the time of deregistration. On the other hand, once liquidated, a company typically ceases to exist forever. It cannot be reinstated unless special appeals are made to authorities like ASIC or the Federal Court, especially in scenarios of unfair dealings or ‘phoenix’ activities.
- A MVL is an effective way to simplify often complex structuring when a company no longer required, which saves on future compliance costs, such as annual audits, ASIC requirements renewal payments, director meetings etc.
Process of MVL:
Step 1 – Meeting of directors
A meeting of directors needs to be called and held, at which a resolution that a Declaration of Solvency (confirming that the company will be able to pay all its creditors within 12 months) be signed and that a general meeting of members be called to consider the resolution that the company be wound up.
Step 2 – Lodge declaration of solvency
The Declaration of Solvency must be lodged before the date on which a notice of meeting of members is sent out.
Step 3 – Notice to members of meeting sent
Members must ordinarily receive 21 days’ notice of the proposed members meeting.
Commonly we will use a Consent to Short Notice, as long as 95% of shareholders agree. This allows the meeting to be called immediately and the resolutions (in Step 4) to be passed by circular.
Step 4 – Meeting of members
At the meeting of members, the following resolutions will need to be passed:
- that the company be wound up;
- that a liquidator be appointed;
- the amount of the liquidator’s remuneration;
- the date when the books and records of the company can be destroyed.
These resolutions are all standard.
Step 5 – Lodge resolutions
Lodge resolutions and advertise on the ASIC notices website, asking creditors to lodge claims against the company if they have any.
Step 6 – Administration of appointment
Finalise company accounts and lodge final tax return (if they haven’t been completed), request tax clearance from the ATO, pay any creditors, distribute surplus/capital back to shareholders.
Step 7 – Finalisation
When the affairs of the company are fully wound up the liquidator will lodge a final receipts and payments (end of administration return)
Step 8 – Deregistration
Company is removed from ASIC register three months after lodgment of final receipts and payments by the liquidator.
Considerations:
We can manage the liquidation very easily, however, tax advice may be required for clients, usually prior to the appointment, if there is any doubt about the tax treatment for shareholders as we are not tax specialists.
