Private ruling: Assessability of liquidation distributions
Date of advice: 31 January 2019
Published: May 2019
Ruling period: Year ended 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Are any distributions made to the shareholders of the Company in the course of the member’s voluntary winding up included in the assessable income of the shareholders under subsection 47(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for the purposes of section 44 of the ITAA 1936? | A1: No | Q2: When CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happens on the cancellation of the shares in the Company following the member’s voluntary winding up, will any resulting capital gain or loss be disregarded? | A2: Yes. | Q3: Are any distributions made to the shareholders of the Company in the course of the member’s voluntary winding up taken to be dividends under Division 7A of the ITAA 1936? | A3: No

Relevant facts and circumstances: Company X (the Company) was incorporated prior to 20 September 1985 and carried on a business until 30 June 20XX. All ordinary shares in the Company were issued/acquired by the shareholders prior to 20 September 1985. The Company owned a land holding which was acquired prior to 20 September 1985. The Company recently decided to wind down its activities and sold the land it owned. It was resolved by the members of the Company that the Company be wound up under a member’s voluntary liquidation and a combined cash/in-specie distribution was made to the shareholders as an interim liquidation distribution. Prior to the interim liquidation distribution being made, the equity in the balance sheet of the Company was entirely represented by pre-CGT shares and a capital profits reserve derived solely from the sale of the pre-CGT land. As at 30 June 20XX, the remaining equity in the balance sheet of the Company was a nominal amount. A final liquidator’s distribution will be made on closure of the Company bank account. An application will be made to de-register the Company prior to the end of the financial year ending 30 June 20XY. A firm of Accountants is carrying out the member’s voluntary liquidation.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 section 44 | Income Tax Assessment Act 1936 section 47 | Income Tax Assessment Act 1936 subsection 47(1) | Income Tax Assessment Act 1936 subsection 47(1A) | Income Tax Assessment Act 1936 subsection 47(2A) | Income Tax Assessment Act 1936 section 109C | Income Tax Assessment Act 1936 section 109NA | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 104-25(5) | Income Tax Assessment Act 1997 section 104-135 | Income Tax Assessment Act 1997 section 118-20

Reasons for decision: Summary: The assessable income of a resident shareholder in a company includes dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it and all non-share dividends paid to the shareholder by the company (section 44 of the ITAA 1936). Amounts distributed to shareholders by a liquidator in the course of winding up a company, to the extent that they represent income derived by the company (whether before or during liquidation) other than income that has been properly applied to replace a loss of paid-up share capital, are deemed for tax purposes to be dividends paid by the company out of profits derived by it (subsection 47(1) of the ITAA 1936). The term ‘income’ covers amounts that are of an income nature, even if exempt. The meaning of the term ‘income’ has been artificially extended by subsection 47(1A) of the ITAA 1936 for these purposes to include: ● any amount, other than a net capital gain, that is assessable income of the company, and ● any net capital gain (except a disregarded capital gain) that would arise under the CGT provisions if each capital gain were calculated without regard to indexation and any capital losses were ignored. Subsection 47(2A) of the ITAA 1936 provides that a distribution made under an informal winding up of a company is also treated for the purposes of section 47 of the ITAA 1936 as a distribution to the shareholders by a liquidator in the course of winding up the company. Subsection 6(1) of the ITAA 1936 states that ‘liquidator' means the person who, whether or not appointed as liquidator, is the person required by law to carry out the winding up of a company. In this case, an interim distribution consisting entirely of a disregarded pre-CGT capital gain on the sale of the land was distributed to the shareholders as part of a member’s voluntary liquidation. Consequently, the amount of the interim and final distributions to the shareholders, as calculated under subsection 47(1A) of the ITAA 1936, are nil and there will not be any assessable income under subsection 47(1) of the ITAA 1936 for the purposes of section 44 of the ITAA 1936. 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 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 (Taxation Determination TD 2001/27). However, any capital gain or loss is disregarded if the shares in the company were acquired prior to 20 September 1985 (subsection 104-25(5) of the ITAA 1997). Where 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 in the company under section 44 of the ITAA 1936, this does not prevent CGT event C2 from happening. However, section 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 by reducing the proportion of the capital gain that is assessable as a dividend. Where there is a non-assessable part of an interim liquidation distribution, as worked out under section 47 of the ITAA 1936, and the company does not cease to exist within 18 months of the distribution being made, CGT event G1 (about capital payments for shares) in section 104-135 of the ITAA 1997 will apply with the result that the non-assessable part of the distribution will be taken to form part of the capital proceeds of the event. In this case, it is intended that the Company will be deregistered and cease to exist within 18 months of the interim distribution; therefore, CGT event G1 will not occur. Further, as the shareholders acquired the shares in the Company prior to 20 September 1985, any capital gain or loss that occurs under CGT event C2 on deregistration of the Company will be disregarded. Section 109C of Division 7A of the ITAA 1936 provides that an amount paid by a private company to a shareholder is taken to be a dividend unless one of the exceptions in sections 109J to 109R of the ITAA 1936 applies. Where a distribution is made by a liquidator in the course of the winding up of a private company, section 109NA of the ITAA 1936 provides that the company is not taken to pay a dividend under section 109C of the ITAA 1936. In this case, a distribution has, and is, being made by a liquidator in the course of the winding up the Company; therefore, section 109C of the ITAA 1936 will not apply to deem a dividend.