Tax Benefits – Pre-CGT Reserves
One of the main reasons to consider a Members Voluntary Liquidation is to receive the very significant tax benefits of a liquidator’s distribution if your company has reserves from the sale of a pre-CGT asset. We’ve explained below the pre-CGT asset tax rules and then how an MVL can work for you.
Do you have proceeds from the sale of a pre-CGT Asset?
Capital Gains Tax laws were introduced in September 1985. However, those rules were not backdated and so if you, or your company have assets that were acquired prior to September 1985, then they remain classified as “pre-CGT” until their eventual sale. That is, 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, proceeds from the sale of a pre-CGT asset is not taxable to the company. However, when it comes to distribution, the amount will become ordinary income, and thus, assessable for tax purposes, if your company simply declares a dividend to its shareholders – that is, those benefits will be lost or reduced.
However, an exception to that rule applies when the distribution is made by 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.
- 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.
It is a little complicated but where your company has a pre-CGT property or where it has made a gain from the sale of a pre-CGT property, it is likely shareholders can receive significant tax savings with the use of a Members Voluntary Liquidation.