Edited version of private advice

Authorisation Number: 1052410408456

Date of advice: 19 June 2025

Ruling

Subject: Winding up of a company

Question 1

Will any part of the application of the monies to which the company is entitled as a distribution by its liquidator (the liquidation funds), to meet the admitted claims of all the unrelated creditors of members of the group, be treated as a dividend paid to the shareholders of the company and assessable as such under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Will the application of the liquidation funds to pay or discharge admitted claims of unrelated creditors of members of the group be treated as a 'payment' to the shareholders of the company by the company pursuant to subsection 109C(3) of the ITAA 1936?

Answer

No

Question 3

Will a scheme under which the liquidation funds are applied to meet the admitted claims of all the unrelated creditors of members of the group constitute a scheme to which section 177D of the ITAA 1936 applies?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 20XX

Relevant facts and circumstances

The group consists of multiple corporate entities (the group companies) and trusts (the group trusts). The company is a group company.

Mr A and Mrs A are the directors of the company (and each of the other group companies). They are also the sole shareholders of the company and residents of Australia for tax purposes.

The liquidator has been appointed the liquidator of all of the group companies, including the company, and is responsible for the management and administration of all of the group trusts.

As part of the liquidation of the group companies and the management and administration of the group trusts, the liquidator has identified that the company is entitled to be distributed approximately $X (the liquidation funds). The liquidation funds represent the company's entitlement to unpaid beneficiary distributions from particular group trusts.

A deed of settlement and compromise (the deed) has been entered into by:

   • the liquidator (in his own right and as the liquidator of the group companies);

   • the group companies in their own right and (in the case of one group company) as trustee of the group trusts;

   • Mr A and Mrs A; and

   • several related parties (comprised of the children of Mr A and Mrs A, or spouses of the children of Mr A and Mrs A).

These parties have entered into the deed to record the terms and conditions on which they agree to resolve issues that have arisen between them in connection with the liquidation of the group companies and the management and administration of the group trusts, including how the liquidator is empowered to deal with the liquidation funds.

As a condition precedent to the application of the liquidation funds in the manner contemplated under the deed, the liquidator will apply to the court to:

   • obtain directions or other court orders pursuant to section 90-15 of Schedule 2 - insolvency practice schedule (Corporations) of the Corporations Act 2001 (Corporations Act) that he is justified and would be acting reasonably in entering into the deed and giving effect to the transactions contemplated by it; and

   • secure such further or other court orders, including under paragraph 477(2B) of the Corporations Act and the Trustees Act 1962 (WA) as applicable, that he considers necessary or appropriate for the purposes of giving effect to his obligations as liquidator and the transactions the subject of the deed.

Pursuant to the deed, by their execution of it, Mr A and Mrs A acknowledge that the liquidator is in control of the company and, subject to compliance with the Corporations Act and any orders made by the court, has the power to apply the liquidation funds:

   • to indemnify Mr A and Mrs A for any tax liability they may suffer or incur as a direct result of the liquidator's application of these monies;

   • in full payment or discharge of priority payments (within the meaning of paragraphs 556(1)(a) to (df) of the Corporations Act) arising in respect of any member of the group;

   • in full payment or discharge of remuneration for professional services and any other cost, expense or liability incurred by the liquidator (in that capacity); and

   • in payment or discharge of admitted claims of unrelated creditors in the winding up of the group, to be paid proportionately if they are unable to be paid in full, and as if they were all claims made in the winding up of the company.

By their execution of the deed, Mr A and Mrs A also do not object to the liquidator applying the liquidation funds in this manner.

According to the liquidator, as at [date] no unrelated creditor claims had been formally admitted. However, the total amount of potential claims of all unrelated creditors of the group as at that date was approximately $X. Of that total, less than $X was attributable to the unrelated creditors of the company.

Apart from settling issues arising from the liquidation of the group companies and the administration of the group trusts, it is advised by the liquidator that the purpose of the deed is to reflect the desire of Mr A and Mrs A to not benefit from the failure of the group, with the proceeds from the assets realised from this process to be distributed to the unrelated creditors of the group on a pari passu basis (as approved by the court).

Assumption

The scheme does not comprise of any steps, events or transactions which are not referred to in this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 paragraph 44(1)(a)

Income Tax Assessment Act 1936 Division 7A of Part III

Income Tax Assessment Act 1936 section 109C

Income Tax Assessment Act 1936 subsection 109C(3)

Income Tax Assessment Act 1936 Subdivision D of Division 7A

Income Tax Assessment Act 1936 section 109NA

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F

Reasons for decision

All subsequent legislative references are to the ITAA 1936, unless otherwise specified.

Question 1

Summary

The application of the liquidation funds to pay or discharge admitted claims of unrelated creditors in the winding up of the group will not be treated as a dividend paid to Mr A and Mrs A, and section 44 does not apply to include any part of the liquidation funds applied in that way as their assessable income.

Detailed reasoning

Paragraph 44(1)(a) states:

The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) includes:

   a. if the shareholder is a resident:

      (i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and

      (ii) all non-share dividends paid to the shareholder by the company;

The term 'dividend' in subsection 6(1) is defined to include any distribution made by a company to any of its shareholders or any amount credited by a company to any of its shareholders as shareholders.

The application of the liquidation funds by the liquidator to pay or discharge admitted claims of unrelated creditors in the winding up of the group, pursuant to the deed, will not constitute a distribution to Mr A and Mrs A or the crediting of an amount to Mr A and Mrs A and, as such, will not be treated as a dividend paid to them by the company. Mr A and Mrs A will therefore not include any part of the liquidation funds applied to this end in their assessable income pursuant to paragraph 44(1)(a).

Question 2

Summary

The application of the liquidation funds to pay or discharge admitted claims of unrelated creditors in the winding up of the group will not be treated as a payment to Mr A and Mrs A by the company pursuant to subsection 109C(3).

Had the application of the liquidation funds in this manner been treated as a payment for the purposes of section 109C, section 109NA would apply to prevent the company from being taken to pay a dividend under section 109C.

Detailed reasoning

Division 7A of Part III is an integrity measure to ensure that private companies do not make tax free distributions of profits to shareholders or their associates in the form of payments, loans and debts forgiven.

Section 109C of Division 7A provides that an amount paid by a private company to a shareholder is taken to be a dividend unless one of the exceptions in Subdivision D applies.

A payment to an entity for the purposes of Division 7A is defined in subsection 109C(3) to mean:

   a. a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and

   b. a credit of an amount to the extent that it is:

      (i) to the entity; or

      (ii) on behalf of the entity; or

      (iii) for the benefit of the entity; and

   c. a transfer of property to the entity.

Where a distribution is made by a liquidator in the course of the winding up of a private company, section 109NA (in Subdivision D) provides that the company is not taken to pay a dividend under section 109C.

The application of the liquidation funds by the liquidator to pay or discharge admitted claims of unrelated creditors in the winding up of the group, pursuant to the deed, will not constitute a payment, or a credit of an amount, to, on behalf of, or for the benefit of Mr A and Mrs A. As such, the application of the liquidation funds in this way will not be a payment to a shareholder for the purposes of section 109C.

In the event that the application of the liquidation funds by the liquidator to pay or discharge admitted claims of unrelated creditors in the winding up of the group did constitute a payment by the company (a private company) to Mr A and Mrs A (shareholders of the company) for the purposes of section 109C (which is not conceded), then section 109NA would be activated such that the company would not be taken under section 109C to pay a dividend (on the basis that the payment is made by a liquidator in the course of the winding up of the company).

Question 3

Summary

The application of the liquidation funds to pay or discharge admitted claims of unrelated creditors in the winding up of the group will not constitute a scheme to which section 177D applies.

Detailed reasoning

Section 177D provides that Part IVA applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA applies to a scheme, the Commissioner can make a determination under section 177F to cancel the tax benefit obtained under the scheme.

A conclusion about a relevant person's purpose is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the matters outlined in subsection 177D(2).

On the facts of the proposed scheme described in this ruling, and having consideration of the matters outlined in subsection 177D(2), there is insufficient tax purpose to engage the application of the general anti-avoidance provisions in Pt IVA.

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