Both solvent and insolvent companies can be wound up voluntarily or involuntarily. While some of the references on this page 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 or the shareholder level (or both).
Shareholders are normally entitled to the surplus that remains after a company has paid off its creditors and discharged all its outstanding liabilities in the winding up process.
Shareholders that 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.
It's important to seek advice from a trusted professional adviser sooner rather than later. Ensure that the person you engage is a registered professional, such as an accountant, lawyer or accredited insolvency adviser.
Be cautious of unregistered advisers who claim to give pre-insolvency advice and who may encourage you to engage in inappropriate or even illegal activity, like illegal phoenix activity. Illegal phoenix activity is when a business is deliberately shut down to avoid paying its debts. It also includes inappropriately removing assets from a business prior to winding up.
Be wary of advisers cold calling you with advice or ways to restructure in a way that will help you avoid paying debts or obligations, or to transfer or conceal assets so that they are not available to pay creditors.
The winding up of a company or the discontinuation of its business is covered in 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. Certain distributions may be deemed to be dividends which 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 it 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.
If you meet specific conditions, we may disregard a deemed dividend that would otherwise arise under Division 7A, or allow you to choose to frank the deemed dividend.
For more information, see Commissioner's discretion under section 109RB.
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.
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 information for companies being wound up as part of a consolidated group, see:
- ATO ID 2003/739 Income tax – consolidation – liquidation of a head company (relates to a head company)
- ATO ID 2003/964 Income tax – consolidation: subsidiary in liquidation – membership of consolidated group (relates to a subsidiary)
- TD 2007/12 Income tax: consolidation: subsidiary in liquidation (relates to intra-group liabilities)
- TR 2007/13 Income tax: application of the transferor trust and controlled foreign company measures (relates to CGT event L5).
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.
Liquidators' income tax responsibilities are separate from, and in addition to, their responsibilities under the Corporations Act 2001 and other taxing Acts.
Our Practice Statement Law Administration in section 5 of PS LA 2011/16 sets out the tax obligations of representatives of incapacitated entities, this includes liquidators and administrators.
Failure to comply may result in penalties or the liquidator being personally liable.
When contacting us about insolvency, complete the Debt insolvency cover sheet. This will ensure your tax clearance request is allocated and actioned correctly.
For more information, see:Find out information on winding up a company.