Private ruling: Liquidator's distribution
Published: December 2012
Ruling period: 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the liquidator's distribution paid from the sale of pre-CGT assets, where the relevant shareholdings are pre-CGT shares, tax free in the hands of the company's shareholders? | A1: Yes | Q2: Is the liquidator's distribution paid from the sale of pre-CGT assets, to be reported in the company's income tax return? | A2: Yes | Q3: Is the liquidator's distribution paid from the sale of pre-CGT assets, where the relevant shareholdings are pre-CGT shares, to be reported in the shareholder's personal income tax returns? | A3: No

Relevant facts and circumstances: The company was registered prior to 1985, with equal shareholders who were entitled to the company capital in the event of a wind up. In 2012, a liquidator was appointed to wind up the company, which has a pre-CGT Capital Reserve amount in profits from the sale of pre-CGT assets.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 47 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 104-135

Reasons for decision: Summary: Subsection 47(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides: Distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it. The effect of section 47 is to treat certain distributions by a liquidator as dividends paid out of profits when they otherwise would have been treated as capital. Where there is a profit on the disposal of a pre-CGT asset by a company in liquidation, section 47 applies to not deem a dividend, as no part of the distributions would represent income derived by the company. (Note: Subsection 47(2B) of the ITAA 1936 provides where the company does not cease to exist within a period of three years after the distribution or within such further period as the Commissioner allows, the distribution shall be deemed to be dividends paid by the company to the shareholders.) Taxation Determination TD 2001/27 is about the CGT implication of liquidator distributions. It provides the full amount of a final distribution made by a liquidator on the winding-up of a company is capital proceeds from the ending of the shareholder's shares in the company for the purposes of capital gains or capital losses made on the happening of CGT event C2 in section 104-25 of the ITAA 1997. The payment of an interim liquidation distribution will also form part of the capital proceeds for the shares under CGT event C2 if the company is wound up within 18 months of the payment. Where a company is dissolved more than 18 months after payment of the interim distribution, the payment is treated as a capital payment for shares under CGT event G1. However, where the relevant shares are pre-CGT assets, any capital gain made is disregarded under subsection 104-135(5) of the ITAA 1997. Taxation Determination TD 95/10 explains the Commissioner's view on the Archer Brothers principle in the context of liquidation distributions. The Archer Brothers principle is if a liquidator appropriates a particular fund of profit or income in making a distribution (or part of a distribution), that appropriation ordinarily determines the character of the distributed amount for the purposes of section 47 and other provisions of the Act. TD 95/10 provides the Commissioner will accept that a liquidator may rely on the Archer Brothers principle if: · a specific provision in the Act does not produce a different result; · the company accounts have been kept so that a liquidator can clearly identify a specific profit or fund in making a distribution; and · it is clear from either the accounts or statement of distribution that the liquidator has appropriated the specific profit or fund in making the distribution. Taxation Ruling TR 94/30 is about the capital gains tax implications of varying rights attaching to shares. It explains that, in general, a variation in rights attaching to a share does not result in a disposal of an asset for CGT purposes unless there is a cancellation or redemption of the share. In your case, we are satisfied the company accounts have been kept so that the liquidator can rely on the Archer Brothers principle. As the relevant shares are pre-CGT shares, the liquidator's distribution paid, from the sale of pre-CGT assets, will be tax free in the hands of its shareholders. Company tax return Page 26 of the Tax Office publication Company tax return instructions 2012 (NAT 0669-6.2012) states: Write at H total dividends, including all dividends and non-share dividends franked and unfranked, foreign source dividends (including New Zealand dividends and supplementary dividends, bonus shares), deemed dividends, and liquidators' and other company distributions. In your case, although section 47 of the ITAA 1936 does not deem a liquidator's distribution to be a dividend (subject to subsection 47(2B)), the instructions to help you complete your company tax return provide liquidators' and other company distributions are to be included in a company tax return.