Members’ Voluntary Liquidation

A Members’ Voluntary Liquidation (MVL) refers to the winding up of a solvent company by a resolution of its shareholders.

Members’ Voluntary Liquidation (MVL)

A company may outlive its usefulness for a number of reasons including:

  • It has ceased to trade;
  • It no longer serves its purpose;
  • The group structure needs to be simplified;
  • Capital assets need to be transferred to a more CGT friendly environment;
  • Distribution of paid up share capital and pre-CGT capital reserves free from tax.

(Outside the liquidation process the distribution of these tax-free reserves may have significant taxation implications).

There are generally two ways to bring a solvent company to an end:

  • Deregistration; and
  • Members’ Voluntary Liquidation

Which one do I choose?

  • Deregistration is a quick, easy and cost effective method of terminating a company. It is the most appropriate method where the company’s affairs are simple with no taxation issues. The company will have ceased to carry on its business, lodged all tax returns, discharged all of its liabilities, and disposed of its assets. All members must agree to the deregistration.

Where a company has untaxed capital profits involving pre-CGT profits or small business CGT concessions, deregistration is not the most appropriate option.

  • A members’ voluntary liquidation is the most tax effective way to wind up a company with pre-CGT profits or tax free profits, as a result of the small business CGT concessions.

Distribution of profits by any other means would result in the distribution being treated as an ordinary dividend and thus may expose shareholders to significant tax liabilities which might otherwise be avoided.

Deregistration

  • An application to deregister the company must be made to ASIC. Once ASIC is satisfied that all prerequisites have been met, ASIC will advertise the intended deregistration. Two months later the company will be deregistered.
  • Members’ Voluntary Liquidation The majority of directors must declare that the company will be able to discharge all of its liabilities within 12 months. The company must then convene a general meeting and resolve to appoint a liquidator.

What are the taxation implications?

Broadly, the funds being distributed by the liquidator maintain their original character.

  • Income – distributions to members generated from the company’s income will be deemed to be a dividend paid to shareholders out of profits.
  • Capital – distributions considered to be capital are commonly non- taxable capital gains, capital royalties, pre-CGT profits or profits subject to the 50% small business reduction.

Distribution can be made in cash, of assets via an in-specie distribution at market value, or may be offset against shareholder loan accounts.

A member receiving a distribution from the liquidation will need to consider their own tax implications separately to those of the liquidator.

The specific circumstances of each particular company must be considered in order to determine the most tax effective means of winding up.