Closing your business
You may decide to close an entity in your private group or your entire business or private group structure.
The disposal of assets, liquidation or vesting of entities may give rise to tax issues that attract our attention, particularly in relation to capital gains tax, extraction of wealth from private companies, tax consolidation, abuse of trusts and lodgment of returns.
Effective tax governance when closing a business helps mitigate unforeseen commercial and tax risks and provides practical certainty for stakeholders.
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The following example illustrates the documentation that should be retained for tax governance purposes where a business is wound down, liquidated and deregistered.
Example: Winding up a company
Despite many years of profitability, due to a change in consumer demand and the economy, the directors of a company believe that continuing to carry on the business will no longer be viable. They decide to liquidate and deregister the company before it becomes unprofitable, rather than disposing of the business. The directors agree to engage a liquidator to start winding up the company in three months, to allow it to fulfil its final contract with a customer.
A dividend was declared and paid to the shareholders before commencing liquidation. The assets of the company were then sold, with proceeds and cash reserves used to pay creditors. Loans provided to shareholders were forgiven. A final dividend was declared by the liquidator and paid to the shareholders before the company was deregistered with ASIC.
Documentation retained for tax governance purposes includes:
- minutes of meetings documenting key decisions relating to the winding up, liquidation and deregistration
- minutes of directors' meetings relating to the dividends declared and paid
- minutes of meetings conducted by the liquidator
- analysis of the tax consequences of the sale of assets and the forgiveness of loans to related parties
- the final tax return and details of payment of tax liabilities.
The company’s shareholders will need to keep documentation to substantiate the cost base of shares in the company for capital gains tax purposes.
End of example
Where there is an intention to vest a trust, the trustee should carefully examine the trust deed to ensure its terms are adhered to.
Written trust resolutions should be made to record the trustee's decisions throughout the vesting process. This is particularly important where the trustee has the discretion to exclude the distribution of income or capital from the winding up process to one or more beneficiaries, unitholders, or classes of unitholders.
Forgiving or assigning related entity loans receivable and payable should be documented. Trustees will need to determine the tax consequences of forgiving a loan.
Where the trust is a unit trust, we suggest that the trustee examine the rights attached to each unit class, in order to determine which unit classes are eligible to receive distributions in the event that the trust is being wound up.
If the trust deed provides for the trustee to transfer assets to a beneficiary or unitholder in order to satisfy a distribution of income or capital where the trust is being wound up, this decision should be recorded. The trustee should consider getting a valuation of the asset in order to show that the asset being transferred does not exceed the amount to which the beneficiary or unit holder is presently entitled. A transfer of the asset could potentially result in a capital gains tax event to the trust and it would be prudent for the trustee to consider the tax consequences.
The trustee will need to notify beneficiaries and unitholders of their share of the income or capital of the trust so they can determine and report their tax obligations.
Where a partnership ends, a final partnership distribution will be necessary.
Each partner will need to retain documentation to substantiate the cost base of their respective interest in the partnership for capital gains tax purposes.
You may decide to close an entity in your private group or your entire business or private group structure. Effective tax governance when closing a business helps mitigate unforeseen commercial and tax risks and provides practical certainty for stakeholders.