Private ruling: Members' voluntary liquidation
Date of advice: 28 February 2023
Published: 17 April 2023
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will a liquidator's distribution sourced from the Company's Capital Profits Reserve be considered a dividend under section 47 of the Income Tax Assessment Act 1936 (ITAA 1936) such that it is assessable to you under section 44 of the ITAA 1936? | A1: No. | Q2: Will CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the liquidator's distribution received by you where the Company ceases to exist within 18 months of the payment? | A2: Yes. | Q3: In the event that the liquidation of the Company occurs more than 18 months after you receive the liquidator's distribution, will CGT event G1 in section 104-135 of the ITAA 1997 apply to the liquidator's distribution? | A3: Yes. | Q4: Will any capital gain made by you in respect of the liquidator's distributions under CGT event C2 or under CGT event G1 be disregarded on the basis that your shares in the Company were acquired prior to 20 September 1985? | A4: Yes.

Relevant facts and circumstances: The Company The Company was incorporated overseas before 20 September 1985 (pre capital gains tax). The Company is a private company, and its shares are not listed on any stock exchange. Since the time of incorporation, the Company has never been an Australian tax resident. The Company has owned and invested in land holdings overseas, many of which were acquired prior to 20 September 1985 (pre capital gains tax). None of the Company's land holdings were situated in Australia. None of the assets of the Company have been taxable Australian property as defined by section 855-15 of the ITAA 1997. The Shareholders The Company is controlled by, and operated for the benefit of, your broader family. You are an Australian resident taxpayer. You are not a director in the Company. The Company has always been limited by ordinary class shares. You acquired your shares pre-CGT and there have been no changes to your shareholdings since acquisition. You became an Australian tax resident after acquiring your shares in the Company. There will be no changes to the Company shareholdings prior to the Liquidator's distributions and deregistration of the Company (outlined further below). Member's Voluntary Liquidation The Company was placed into Members' Voluntary Liquidation (MVL) by way of member's resolution in the income year ended 30 June 20XX. Company liquidators have been appointed (the liquidator) and they are required by the laws of the Company's country of incorporation, to carry out the winding-up of the Company. You are seeking confirmation of the income tax treatment of a proposed final liquidator's distribution. It is proposed that the liquidator will realise the receivables and discharge the Company's liability obligations. Following these steps, the resulting cash will be returned as a first and final dividend to the Company's members. As a result, the entirety of the liquidator's distributions to shareholders will be made in cash. The liquidator's distributions are to be split between shareholders proportionately based on the number of shares held by each shareholder in the Company, including that the pre-CGT and post-CGT profits held in the capital profits reserve will be proportionately distributed to Company shareholders based on number of shares held by each shareholder. Copies of the draft final liquidator's distribution letter has been provided to us. Based on the drafts, the distribution to be received is estimated as follows: Draft final liquidator's distribution Amount Share capital XXX Revaluation reserve XXX Capital profits reserve XXX Retained profits XXX Total cash payable XXX The draft liquidator's distribution above is not expected to materially change. Capital Profits Reserve The Company held a number of pre-CGT and post-CGT landholdings. The disposal of these landholdings has contributed to its Capital Profits Reserve balance. The Company continuously held 100% of the legal and beneficial ownership of its landholdings that have, over time, resulted in accretions to its Capital Profits Reserve account. The liquidator has been able to separately identify the landholding sales that resulted in accretions to the Capital Profits Reserve account as each sale is individually detailed in the detailed ledger for the account. You have confirmed that: The distribution sourced from the Company's Capital Profits Reserve will be debited against the Capital Profits Reserve account. There have been no other changes to the Company's Capital Profits Reserve and no further increases are expected prior to the proposed MVL.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 section 44 | Income Tax Assessment Act 1936 subsection 44(1) | 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 1997 section 104-10 | Income Tax Assessment Act 1997 section 104-10(5) | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 104-25(2) | Income Tax Assessment Act 1997 subsection 104-25(5)(a) | Income Tax Assessment Act 1997 section 104-135 | Income Tax Assessment Act 1997 section 104-135(1) | Income Tax Assessment Act 1997 section 104-135(5) | Income Tax Assessment Act 1997 section 104-135(6) | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 section 855-10 | Income Tax Assessment Act 1997 section 855-45 | Income Tax Assessment Act 1997 section 855-45(1)

Reasons for decision: Summary: The liquidator's distribution sourced from the Company's Capital Profits Reserve will not be considered a dividend under section 47 of the ITAA 1936. As such, the liquidator's distribution will not be assessable to you under section 44 of the ITAA 1936. | Detailed Reasoning - Dividends: Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income any dividends paid to the shareholder out of profits derived by the company from any source (if a resident of Australia) and from an Australian source (if a non-resident). The term dividend in subsection 6(1) of the ITAA 1936 includes any distribution made by a company to any of its shareholders. However, paragraph (d) of the definition of dividend of subsection 6(1) of the ITAA 1936 excludes a distribution from the meaning of dividend if the amount of a distribution is debited against an amount standing to the credit of the company's share capital account. Distributions to shareholders of a company by a liquidator in the course of winding up the company are, at first instance, not considered to be distribution out of profits of the company. At common law, a distribution to a shareholder by a liquidator is capital in the hands of the shareholder since it is a realisation of the shareholder's interest in the company: FC of T (NSW) v Stevenson (1937) 4 ATD 415; (1937) 59 CLR 80; FC of T v Blakely (1951) 9 ATD 239 at 245, 247; (1951) 82 CLR 388 at 402, 407; FC of T v Brewing Investments Ltd [2000] FCA 920; 2000 ATC 4431 per Hill J at 18 - 19 . Accordingly, the proposed first and final liquidator's distribution to be received by you will not considered to be a dividend paid out of profits derived by the Company for the purposes of section 44 of the ITAA 1936. This is supported by the inclusion of Section 47 of the ITAA 1936, which governs liquidator's distributions that would otherwise fall out of the ambit of Section 44. Section 47 of the ITAA 1936 specifically deems certain amounts to be dividends paid to the shareholders out of the profits derived by the company. Distributions that meet the requirements of section 47 of the ITAA 1936 fall back within the scope of section 44 of the ITAA 1936. | Detailed Reasoning - Liquidator's Distributions: Subsection 47(1) of the ITAA 1936 provides: Distributions by liquidator 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. Liquidator is defined by subsection 6(1) of the ITAA 1936 as follows: "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. The appointed liquidator is required, by the laws of the Company's country of incorporation, to carry out the winding-up of the Company. Accordingly, the proposed final liquidator's distribution to be received by you will be of a type that is captured by subsection 47(1), to the extent to which it represents 'income' derived by the Company. The use of the term'income' in the context of subsection 47(1) of the ITAA 1936 has been interpreted in Gibb v FCT (1966) 118 CLR 628 as meaning 'income according to ordinary concepts' rather than 'assessable income'. Hence, amounts that are deemed to be assessable income but are not of an income character are not considered, for the purposes of subsection 47(1) of ITAA 1936, to be income. You are anticipating the receipt of the following liquidator's distribution from the Company, categorised based on the equity account it will be appropriated from: Draft final liquidator's distribution Amount Share capital XXX Revaluation reserve XXX Capital profits reserve XXX Retained profits XXX Total cash payable XXX The amounts included in the Company's Capital Profits Reserve account and the Company's Share Capital account do not represent income according to ordinary concepts. Each accretion to the Company's Capital Profits Reserve account represented capital profits derived by the Company from the sale of its pre-CGT and post-CGT assets. Accordingly, the amounts within the Company's Capital Profits Reserve do not ordinarily fit within the ambit of 'income' in subsection 47(1) of the ITAA 1936. | Detailed Reasoning - Extension of income definition: Subsection 47(1A) of the ITAA 1936 extends the ordinary definition of income referenced in subsection 47(1) as follows: (1A) A reference in subsection (1) to income derived by a company includes a reference to: (a) an amount (except a net capital gain ) included in the company 's assessable income for a year of income ; or (b) a net capital gain that would be included in the company 's assessable income for a year of income if the Income Tax Assessment Act 1997 required a net capital gain to be worked out as follows: Method statement Step 1. Work out each capital gain ( except a capital gain that is disregarded ) that the company made during that year of income . Do so without indexing any amount used to work out the cost base of a CGT asset . Step 2. Total the capital gain or gains worked out under Step 1. The result is the net capital gain for that year of income . The effect of subsection 47(1A) of the ITAA 1936 is that it only includes in income net capital gains that are included in a company's assessable income (without indexation) under Part 3-3 of the ITAA 1997. Capital gains that are 'disregarded' or otherwise not within the concept of a net capital gain included in the assessable income of the company are not within the extended meaning of the word 'income'. The amounts included in the Company's Share Capital account do not fit within the extended definition of 'income' under subsection 47(1A) as they do not represent assessable income of the Company or a net capital gain that would have been included within the assessable income of the Company under the method statement. | Detailed Reasoning - Disregarded capital gains: Subsection 47(1A) of the ITAA 1936 was introduced by the Taxation Laws Amendment (Company Distributions) Act 1987 No.58 of 1987. The Explanatory Memorandum to the Bill explained: Subsection 47(1) of the Principal Act deems distributions to shareholders of a company by a liquidator in the course of winding up the company to be dividends paid to the shareholders out of profits to the extent to which they represent income derived by the company. For these purposes, income has its ordinary meaning and does not include amounts - such as certain capital profits - that are specifically included in assessable income of a taxpayer by various provisions of the income tax law. Clause 8 proposes to insert a new subsection - subsection (1A) - in section 47 of the Principal Act to extend the meaning of the phrase "income derived by the company" for the purposes of subsection (1). By this extension, liquidator's distributions out of realised capital gains on taxable assets acquired after 19 September 1985, and out of all amounts (other than the assessable portion of such gains) which are assessable income of a company under the income tax law, are deemed to be dividends paid to shareholders out of profits of a company. ... these tests will ensure that a distribution to a shareholder by a liquidator in the course of winding up a company is also deemed to be a dividend paid to the shareholder by the company out of profits derived by it to the extent that the distribution is made out of an actual gain on disposal of a taxable asset to which Part IIIA of the Principal Act has application. A further technical amendment was made by Taxation Laws Amendment Act (No.4) 2000 (114 of 2000) which inserted within the method statement in subsection 47(1A) of the ITAA 1936 after 'each capital gain' it inserted "( except a capital gain that is disregarded )". The Explanatory Memorandum for this Bill said that this amendment: Clarifies the method statement to ensure that capital gains that have been disregarded (e.g. under a rollover provision) are not income derived by the company. This correctly reflects the intention of the provision. The Company's Capital Profits Reserve account represents capital profits from the sale of pre-CGT and post-CGT properties. When each property was sold by the Company, it triggered a CGT event for the Company which prima facie resulted in a capital gain for the Company (for example, a disposal of the property likely resulted in CGT event A1 being triggered for the Company with the resulting capital gain or loss calculated under subsection 104-10 of the ITAA 1997). The resulting capital gains from the sales of the pre-CGT and post-CGT properties, represented by accretions to the Company's Capital Profits Reserve, were not taxable in Australia on the basis that: More specifically, these capital gains derived by the Company were not taxable in Australia as they were "disregarded". For example, for the Company's pre-CGT properties, the exclusion for CGT event A1 in subsection 104-10(5) of the ITAA 1997 reads: (5) A capital gain or capital loss you make is disregarded if: (a) you acquired the asset before 20 September 1985 For those capital gains that related to properties that were acquired after 20 September 1985 (post-CGT), subsection 855-10 of the ITAA 1997 applied to disregard these capital gains as follows: Disregarding a capital gain or loss from CGT events (1) Disregard a capital gain or capital loss from a CGT event if: (a) you are a foreign resident , or the trustee of a foreign trust for CGT purposes , just before the CGT event happens; and (b) the CGT event happens in relation to a CGT asset that is not taxable Australian property . The capital gains derived by the Company from the sale of its pre-CGT and post-CGT properties, represented by the accretions to its Capital Profits Reserve account, were each 'disregarded' under the Act and so are specifically excluded from the method statement in subsection 47(1A) of the ITAA 1936. Accordingly, the amounts included in the Company's Capital Profits Reserve are not included in the extended definition of 'income' under subsection 47(1A) of the ITAA 1936. | Detailed Reasoning - Archer Brothers principle: The interpretation of subsection 47(1A) of the ITAA 1936 is predicated on the ability of the liquidator to attribute a portion of a distribution as having been sourced from that non-taxable capital gain. Taxation Determination 95/10 Income tax: what is the significance of the Archer Brothers principle in the context of liquidation distributions? (TD 95/10) explains the Commissioner's view on that same ability in the context of liquidation distributions under the Archer Brothers principle. The Archer Brothers principle is if a liquidator appropriates a particular fund of profit or income in making 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: (i) a specific provision in the Act does not produce a different result; (ii) the company accounts have been kept so that a liquidator can clearly identify a specific profit or fund in making a distribution; and (iii) 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. In this case, the Company has kept accounts that clearly identify its Capital Profits, as these have been separately accounted for in the company's equity accounts under its Capital Profits Reserve account. Within the reserve account, the character of each accretion to the account can clearly be identified (ie. it can be identified which capital profit was from the sale of a particular property and the Company can identify whether these properties were pre-CGT or post-CGT properties). Accordingly, a liquidator would clearly be able to identify the Company's disregarded capital gains in the making of its distribution. The liquidator's distribution that is sourced from disregarded capital gains will be debited against the Capital Profits Reserve account. Finally, in making a first and final liquidator's distribution, the statement of distribution from the liquidator will make it clear as to the quantum that each shareholder has received that has been appropriated from the Capital Profits Reserve account. Accordingly, it is accepted that the capital distribution proposed to be made by the liquidator from the Company's Capital Profits Reserve will be made in accordance with the Archer Bros Principle. | Detailed Reasoning - Conclusion: The distribution by the liquidator of the Company's Capital Profits Reserve, which includes its pre-CGT and post-CGT capital profits from the sale of foreign property, will not be considered a dividend under subsection 47(1) of the ITAA 1936 and accordingly will not be assessed to you under section 44 of the ITAA 1936. | Summary: CGT event C2 in section 104-25 of the ITAA 1997 will apply to the liquidator's distribution received by you where the Company ceases to exist within 18 months of the payment. | Detailed Reasoning - Detailed reasoning: Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled (b) being released, discharged or satisfied (c) expiring; or (d) being abandoned, surrendered or forfeited; or .... The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, when the asset ends per subsection 104-25(2) of the ITAA 1997. The Commissioner's view on the treatment of liquidator's distributions for capital gains tax purposes is outlined in Taxation Determination 2001/27 Income tax: capital gains: how do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 ('ITAA 1997') treat: (a) a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the Income Tax Assessment Act 1936 ('ITAA 1936') to be a dividend; and (b) an interim liquidation distribution to the extent it is not deemed to be a dividend by subsection 47(1)? (TD 2001/27) TD 2001/27 explains that the full amount of a 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. Where the company is wound up within 18 months of the distribution, the relevant CGT event will be CGT event C2 in section 104-25 of the ITAA 1997. If the Company is wound up within 18 months of the liquidator's distribution, CGT event C2 will be triggered, and the liquidator's distribution will be included in your proceeds to work out any capital gain or loss from the event. You will calculate your capital gain or loss as the difference between the capital proceeds from the liquidator's distribution and the cost base of your shares. The anti-overlap provision in section 118-20 of the ITAA 1997 reduces any capital gain by amounts that are otherwise assessable as a result of the event. Accordingly, any component of the liquidator's distribution that would be a dividend under subsection 47(1) of the ITAA 1936 will reduce your capital gain, as the amount will be otherwise assessable as a dividend under section 44 of the ITAA 1936. The portion of the liquidator's distribution that has been appropriated from the Share Capital account or the Capital Profits Reserve account are not assessable dividends under subsection 47(1) of the ITAA 1936. Accordingly, the anti-overlap provision in section 118-20 of the ITAA 1997 will not need to apply to these components and they will form part of your capital gain or loss from CGT event C2. In this case the following amounts would form part of your proceeds for CGT event C2: Draft final liquidator's distribution Amount Share capital XXX Capital profits reserve XXX | Summary: CGT event G1 in section 104-135 of the ITAA 1997 will apply to the liquidator's distribution if the liquidation of the Company occurs more than 18 months after the liquidator's distribution. | Detailed Reasoning - Detailed reasoning: Section 104-135 of the ITAA 1997 provides that CGT event G1 happens if: (a) a company makes a payment to you in respect of a share you own in the company (except for CGT event A1 or C2 happening in relation to the share ); and (b) some or all of the payment (the non-assessable part ) is not a dividend , or an amount that is taken to be a dividend under section 47 of the Income Tax Assessment Act 1936 ; and (c) the payment is not included in your assessable income . TD 2001/27 explains that CGT event G1 in subsection 104-135(1) of the ITAA 1997 may result in capital gains being made and (or) the need for cost base and reduced cost base reductions in respect of shares in a company in liquidation. However, it may do so only to the extent that the distribution made by the company's liquidator is not an amount that is deemed to be a dividend under subsection 47(1) of the ITAA 1936. The part that is not deemed to be a dividend under subsection 47(1) of the ITAA 1936 is called the 'non-assessable part'. Generally, where a company is liquidated within 18 months of a liquidator's distribution, CGT event C2 will take precedence due to the exception within CGT event G1 in subsection 104-135(6) of the ITAA 1997 as follows: (6) You disregard a payment by a liquidator for the purposes of this section if the company ceases to exist within 18 months of the payment . In the event that the Company does not cease to exist within 18 months of the first and final liquidator's distribution, CGT event G1 will be triggered (and not CGT event C2). The effect of CGT event G1 in relation to the non-assessable part is to reduce the cost base and reduced cost base of the shareholder's share as at the time of the payment. The reduction amount is the non-assessable part of the distribution and, if the non-assessable part of the distribution is greater than the cost base (the difference being 'the excess'), the shareholder makes a capital gain equal to the excess at the time of the payment. The shareholder would take that capital gain into account in calculating their net capital gain or net capital loss for the income year in which the payment is made. In this case the non-assessable part would include the amounts distributed from the Share Capital account and the amounts distributed from the Capital Profits Reserve account as follows: Draft final liquidator's distribution Amount (SGD) Share capital XXX Capital profits reserve XXX If the Company does not cease to exist within 18 months of the liquidator's distribution, you will calculate any capital gain from the liquidator's distribution under CGT event G1 (and not CGT event C2). Where the amounts you receive from the Company's Share Capital and Capital Profits Reserve accounts are greater than the cost base of your shares, the excess will result in a capital gain. | Summary: Any capital gain made by you in respect of the liquidator's distributions under CGT event C2 or under CGT event G1 will be disregarded on the basis that your shares in the Company were acquired prior to 20 September 1985. | Detailed Reasoning - Detailed reasoning: CGT event C2 and CGT event G1 both contain excluding provisions which disregard any capital gain or loss calculated under the respective event where the asset was acquired prior to 20 September 1985 (pre-CGT). These exclusions are contained in subsections 104-25(5) and 104-135(5) of the ITAA 1997. You became an Australian tax resident after acquiring your shares in the Company. Subsection 855-45 of the ITAA 1997 contains special rules that apply to an individual's CGT assets when they become a resident of Australia for income tax purposes. The effect of this subsection is to treat the individual as having acquired the assets on the day they become an Australian tax resident and the asset's cost base becomes the market value of the asset on that day. These provisions apply subject to subsection 855-45(1) of the ITAA 1997 which says: If you become an Australian resident, there are rules relevant to each CGT asset that you owned just before you became an Australian resident, except an asset: (a) that is taxable Australian property ; or (b) that you acquired before 20 September 1985. You acquired your shares before 20 September 1985 and accordingly subsection 855-45 of the ITAA 1997 did not apply to your shares in the Company when you became an Australian resident. Your shares continued to be treated as having been acquired pre-CGT. There have been no changes to your shareholdings that would cause the shares to become post-CGT shares under the Income Tax provisions. You hold pre-CGT shares in the Company and accordingly, any capital gain made you make under CGT event C2 or CGT event G1 will be disregarded under the exceptions of the respective events in subsection 104-25(5) and subsection 104-135(5) of the ITAA 1997.

The properties have always been held by the Company as capital investments. | The Company did not undertake any development activities in relation to the properties described in the table above. | The Company's property portfolio strategy was in relation to earning passive income, primarily in the form of rental income from leasing its properties. | The purchase of these properties by the Company was not for a profit-making intention at the time of purchase but rather as an investment in the passive rental income stream from the properties. | The sale of the properties resulted in capital profits for the Company and not income according to ordinary concepts. | In most instances, the capital gains related to properties that had been acquired by the Company prior to 20 September 1985 (pre capital gains tax). | The Company is a foreign resident for Australian tax purposes and none of the properties were situated in Australia and so they were not 'taxable Australian property' as defined by section 855-15 of the ITAA 1997.