Item 6: Winding up a company
Under corporations law, both solvent and insolvent companies can be wound up voluntarily or involuntarily.
While some of the references in this document relate to the winding up of insolvent companies, they may also apply to the voluntary winding up of solvent companies.
The tax consequences of winding up a company can be at the company level and/or at the shareholder level.
Shareholders are normally entitled to the surplus which remains after a company has paid off its creditors and discharged all of its outstanding liabilities in the winding up process.
Shareholders who receive distributions of surplus assets in the winding up of Australian companies may be liable to taxation under either the deemed dividends or capital gains tax provisions.
6.1 Deemed dividends
The winding up of a company or the discontinuation of its business is brought within the scope of section 47 of the Income Tax Assessment Act 1936 (ITAA 1936). The basis of section 47 is that it may deem certain distributions to be dividends. The deemed dividends are included in the shareholder's assessable income.
The appropriation of a distribution from a particular fund (such as paid-up capital, retained earnings or capital gains accounts) determines the character of the distributed amount.
In certain situations, the character of these amounts does not 'wash out' in the course of liquidation distributions as it would if made prior to liquidation. For example, a pre-capital gains tax (CGT) capital gain in the hands of the company may retain its tax exempt status when distributed by a liquidator, but may lose its exempt status if distributed prior to liquidation.
Taxation Determination TD 95/10 explains how the appropriation from a particular fund determines the character of the distributed amount.
TD 2000/5 explains how capital losses are treated in the context of TD 95/10.
6.2 Capital gains tax
In general, the normal CGT provisions apply to an act carried out by a liquidator, as if the act had been carried out by the company. For example, if a liquidator sells a CGT asset of the company, any capital gain or loss is made by the company, not by the liquidator.
At the shareholder level, the CGT provisions can also be triggered when a company being wound up makes final or interim distributions and/or when a company is deregistered under the Corporations Act 2001.
TD 2001/27 explains how the CGT provisions treat final and interim distributions where all or part of the distribution is not deemed to be a dividend under section 47.
In certain circumstances, shareholders can choose to realise a capital loss on worthless shares prior to the dissolution of the company.
6.3 Other considerations
Commercial debt forgiveness provisions may apply where a company's obligation to pay a commercial debt is extinguished because the company is wound up.
For more information, refer to ATO Interpretative Decision ATO ID 2003/281.
If the company being wound up is part of a consolidated group, refer to:
6.4 A liquidator's taxation responsibilities
The appointment of a liquidator can be compulsory or voluntary for either solvent or insolvent companies.
Normally, a liquidator must be a registered liquidator and must not be an officer, employee or auditor of the company. However, a member's voluntary winding up is exempted from this requirement under the Corporations Act 2001.
Information for trustees appointed under the Corporations Act 2001 outlines liquidators' income tax responsibilities (which are separate from, and in addition to, their responsibilities under the Corporations Act 2001 and other taxing Acts).
Chapter 31 of the ATO Receivables Policy sets out the obligations of trustees and liquidators imposed by taxation laws.
To ensure your tax clearance request is allocated and actioned correctly, read the information on using the facsimile template.
Failure to comply may result in penalties or the liquidator being personally liable.
For more information on the obligations of liquidators, refer to ATO ID 2003/506.