If you are looking for a good way to wrap up a business, you might consider the cost-effective measures that can come with deregistering a company.
Upon deregistering a company, there are several tax issues to consider. A paramount issue is that you must make sure that funds are available to pay all dividend payments. You also must ensure there are enough franking credits available to avoid the dividends becoming unfranked. Alternatively, the company can decide to pay a franking deficit tax.
There is also Capital Gains Tax (CGT) to consider. Upon the cancellation of shares, shareholder interest in the company provides a CGT Event C2. Various actions can set off various CGT provisions. Event C2 is an example of this kind of provision. The Event C2 will effectively enable a CGT position to be calculated. Depending on the circumstances, shareholders can encounter a situation where they receive dividends but realise a capital loss as a result of the cancellation of the shares.
Alternatively, you can consider a Members Involuntary Liquidation to wind up a solvent company. This will result a significant different position to the distributions because they will be treated as the liquidator’s distributions. In broad terms it will allow certain amounts to be distributed as capital instead of dividends for tax purposes. This can deal with pre-CGT items or capital gains concessionally treated under the Small Business Capital Gains Tax Concessions.
When a liquidation process has been put in motion (similar to deregistration), shares have to be cancelled after distributions have been made. This will trigger a CGT Event G1 and/or C1. These arrangements are concessional and the cost base of the share can be adjusted.
As a conclusion, where there are significant CGT issues arising from exempt capital profit reserves, or CGT Concessions being available to shareholders, the Members Voluntarily Liquidation is thought to be the best course of action. Planning and understanding your options will help you to choose the path that is best suited for you and your business.