IR has now finalised its QWBA on the question of what is the first step legally necessary to achieve liquidation when a liquidator is appointed. Understanding the Commissioner’s position in this regard is important, because distributing capital gains to shareholders outside of the ‘on liquidation’ period for a company, converts that capital gain into a taxable dividend, often with the inability to attach imputation credits subsequently due to timing restrictions.
QB 20/03 is also useful, because while it is targeted towards long-form liquidations (that where a liquidator is actually engaged to complete a formal liquidation process), it also provides commentary on short-form liquidations (arguably of more interest to most of us I would suggest) in order to point out potential differences in timing triggers between the two options.
Most of you are hopefully aware by now, post the previous release of BR Pub 14/09, that in respect to a short-form liquidation, you simply need to have your client’s sign a resolution that their company will:
- Cease business
- Pay all creditors
- Distribute surplus assets, and then,
- Request removal from the register of companies.
Once this resolution is signed (and provided the company actually ceases to trade and does end up being removed from the register), then capital gain distributions can proceed and will retain their tax-free status, as the distribution will be deemed to have occurred ‘on the liquidation’ of the company.
However, as QB 20/03 points out, the taking of the same action under a long-form liquidation process, will not necessarily trigger the commencement of the ‘on liquidation’ period. In this regard, a long-form liquidation of a solvent company generally commences when the shareholders pass a special resolution to appoint a named liquidator. From a timing perspective, this requires that the named liquidator has validly consented in writing to be appointed prior to the shareholders passing the resolution.
Consequently, if the above resolution is signed prior to the liquidator having provided their written consent to act, then it does not trigger the commencement of the ‘on liquidation’ period. Equally, steps undertaken such as the holding of a special meeting of the shareholders to discuss the liquidation of the company, and/or obtaining the written consent of the liquidator, are considered to be only preparatory steps to a liquidation process, and it is not until the above resolution is signed post the receipt of the liquidators written consent, that the company will be considered by the Commissioner to have commenced the ‘on liquidation’ period. The shareholders for example, may not proceed to sign the resolution even though the liquidator has consented to act for the company, and consequently the liquidation never actually proceeds.
So be conscious of the timing issues, as with the requirement for imputation credits to be attached to a dividend at the time it is paid, subsequently discovering that your client’s capital gain distribution is now considered to be a taxable dividend, could be an expensive learning lesson!