Members Voluntary Liquidation and pre-CGT assets – the tax benefits
While I am on a roll with blogs on Members Voluntary Liquidation and the associated CGT Tax Benefits, I thought I’d expand upon the significant tax benefits that can be gained by using an MVL in conjunction with capital gains that are pre-CGT legislation.
Do you have proceeds from the sale of a pre-CGT Asset?
CGT laws were introduced, with a thump, in September 1985. However, the CGT laws were not backdated and so if your company has assets that were acquired prior to September 1985, then they remain classified as “pre-CGT” until their eventual sale. That is, capital gains tax will not apply to profits on a pre-CGT asset. There are exceptions to that general rule, so you should speak to your tax adviser to ensure your assets are pre-CGT. So, gains from the sale of a pre-CGT asset are not taxable to the company. However, when it comes to distributing those gains to shareholders it can get trickier. Any ordinary distribution by the company to shareholders will be regarded as ordinary income – that is, assessable for tax purposes.
Except!!! Here is the good news for shareholders, and me as a Liquidator! That is, if a liquidator distributes a capital gain from a pre-CGT asset sale, then that gain remains tax free for the shareholders.
How much does this benefit the Shareholder?
This depends on what type of shares you are holding:
- Pre CGT shares: the capital proceeds distributed will not be taxable.
- Post CGT shares: you will need to check whether your shares satisfy the 80% test to determine what benefits apply. If your shares satisfy the test, they qualify as active assets under the small business CGT concessions. This means that you can then apply for further concessions (50% CGT discount and small business CGT concessions) to the capital proceeds you received to minimize taxable income.
Here is a summary:
|What’s your situation?||Pre-CGT Asset||CGT Asset|
|Pre-CGT shares||Distribution: proceeds from sale are distributed as capital proceeds from the cancellation of shares.Shareholder Level: not taxable due to pre-CGT nature.||Distribution: the “exempted” component is distributed as capital proceeds from the cancellation of sharesShareholder Level: not taxable due to pre-CGT nature.|
|CGT shares||Distribution: proceeds from sale are distributed as capital proceeds from the cancellation of shares.Shareholder Level: further CGT concessions may apply to reduce tax payable on distribution.||Distribution: the “exempted” component is distributed as capital proceeds from the cancellation of sharesShareholder Level: further CGT concessions may apply to reduce tax payable on distribution.|
It is a little complicated so just bear in mind that where your company has a pre-CGT assets there could be significant tax benefits available…. So tread warily and get advice from your accountant.