Edited version of your written advice

Authorisation Number: 1013128738746

Date of advice: 24 November 2016

Ruling

Subject: Liquidator distribution

Question 1

Is any part of the distribution you received from the liquidator assessable under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is the distribution you received considered capital proceeds for capital gains tax (CGT) event C2?

Answer

Yes, however any capital gain will be reduced to the extent the amount was assessable under section 44 of the ITAA 1936.

This ruling applies for the following periods

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commenced on

1 July 2015

Relevant facts and circumstances

You are a shareholder of a company.

The company is being liquidated.

The liquidator will make a distribution to you and the other shareholder. Part of this payment will come from the retained profits account.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 47

Income Tax Assessment Act 1936 subsection 47(1A)

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 118-20(1)

Income Tax Assessment Act 1997 subsection 118-20(1A)

Reasons for decision

Question 1

Section 47 of the ITAA 1936 deals with distributions made by liquidators. Distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, are deemed to be dividends paid to the shareholders by the company out of profits derived by it.

Subsection 47(1A) of the ITAA 1936 explains that income derived by a company includes a reference to:

a) an amount (except a net capital gain) included in the company's assessable income for a year of income; or

b) a net capital gain that would be included in the company's assessable income for a year of income if the ITAA 1997 required a net capital gain to be worked out as follows:

Method statement

Step 1.

Work out each capital gain (except a capital gain that is disregarded) that the company made during that year of income.

Step 2.

Total the capital gain or gains worked out under Step 1. The result is the net capital gain for the year of income.

Subsection 44(1) of the ITAA 1936 states that the assessable income of a resident shareholder in a company includes dividends that are paid to the shareholder by the company out of profits derived from any source.

Application to your circumstances

In this case the liquidator will make a final distribution to you as shareholder in the company. At least part of this payment will come from the company's retained profits account. Section 47 of the ITAA 1936 deems such a distribution to be a dividend in the hands of the shareholder. Therefore, this part of the distribution will be included in your assessable income under section 44 of the ITAA 1936.

Question 2

Under section 108-5 of the ITAA 1997 an asset for CGT purposes is any form of property or a legal or equitable right that is not property. An example of a CGT asset is a debt owed to you.

Under section 102-20 of the ITAA 1997 you make a capital gain or capital loss as a result of a CGT event.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if the ownership of an intangible CGT asset ends by the asset:

a) being redeemed or cancelled

b) being released, discharged or satisfied

c) expiring; or

d) being abandoned, surrendered or forfeited

The time of the event is when you enter into the contract, that results in the asset ending or if there is no contract, when the asset ends.

Taxation Determination TD 2001/27 considers how parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) treat a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the ITAA 1936) to be a dividend.

Paragraph 1 of the ruling states that:

The full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company for the purposes of capital gains or capital losses made on the happening of CGT event C2 (about cancellation, surrender and similar endings) in section 104-25 of the ITAA 1997. After the winding-up of a company, CGT event C2 happens to the shares when the company ceases to exist in accordance with the Corporations Act 2001 (see Taxation Determination TD 2000/7 paragraphs 3 and 4).

If all or part of a final distribution made by a liquidator of a company is deemed by subsection 47(1) of the ITAA 1936 to be a dividend paid out of profits, and to be assessable income of a shareholder under subsection 44(1) of the ITAA 1936, this does not alter the position stated in paragraph 1 of TD 2001/27.

However, subsection 118-20(1) of the ITAA 1997, when read with subsection 118-20 of the ITAA 1997, ensures that no part of the final liquidator's distribution is taxed both as a dividend and as a capital gain.

Subsection 118-20(1) of the ITAA 1997 states that a capital gain you make from a CGT event is reduced if, because of the event, a provision of this Act (outside of this part) includes an amount (for any income year) in:

a) you assessable income or exempt income; or

b) if you are a partner in a partnership, the assessable income or exempt income for the partnership.

Subsection 118-20(1A) of the ITAA 1997 applies to an amount that, under a provision of this Act (outside of this part), is included in:

a) your assessable income or exempt income; or

b) if you are a partner in a partnership, the assessable income or exempt income of the partnership;

in relation to a CGT asset as if it were so included because of the CGT event referred to in that subsection if the amount would also be taken into account in working out the amount of a capital gain you make.

Application to your circumstances

In your case the liquidator will make a final distribution to you as a shareholder in the company. As discussed in TD 2001/27, the full amount of this distribution constitutes capital proceeds from the ending of your shares which will trigger CGT event C2. However, subsections 118-20(1) and 118-20(1A) will operate to reduce any capital gain to the extent that the payment is assessable as a dividend.