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Members Voluntary Liquidation
While liquidation is usually associated with financial difficulty, it’s not always the case. In the process of Members’ Voluntary Liquidation (MVL), a liquidator is appointed to formally wind up a solvent company.
A Members Voluntary Liquidation (MVL) Arrangement is a process of unlocking the assets in your business.
Unlike insolvent businesses your business will be solvent and this is a method of enabling the shareholders of the business to have a tax efficient return of their investment.
The benefits are mainly tax related where the distribution of funds to shareholders is treated as capital rather than income, plus this can enable entrepreneurs relief where applicable.
This is quite typical where directors may wish to retire or when the business does not see a continued future before it may become insolvent.
An MVL is valid for up to 12 months, during which time any creditors of the business must have been paid in full.
Whilst some aspects may appear complicated we can help you decide if an MVL is the right route to take.
Sometimes the directors of a solvent company may decide to wrap up their company because:
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It’s no longer operating and the directors/members have no further use for it
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The ongoing compliance costs of lodging documentation with ASIC need to be reduced
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The shareholders wish to access the company’s equity in a tax-effective manner.
A company remains registered even after it ceases to trade. This means it’s still subject to all the requirements of a registered company, such as lodging and paying annual statements/reviews.
There are two formal processes for finalising the affairs of a solvent company:
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De-registration
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Members’ Voluntary Liquidation (MVL).
De-registration
In this process, an application is made to the Australian Securities and Investments Commission (ASIC) to have the company removed from the ASIC register of companies.
This application can be effectively lodged providing all the following criteria apply:
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All members of the company agree to the de-registration
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The company is not carrying on business
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The company’s assets are worth less than $1000
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The company has paid all fees and penalties payable under this Act
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The company has no outstanding liabilities
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The company is not a party to any legal proceedings.
There is a lot to consider before placing a company into MVL.
Every company is different, so each case needs to be individually assessed.
Our team at EZY Debt Solutions has considerable experience in the MVL process.
Tax Benefits
An MVL is commonly carried out when members wish to make tax effective use of the company’s equity.
The ATO treats distributions made by the company in the ordinary course of business differently to a liquidator’s distribution in a MVL as per the table below.
The benefits in the tax treatment of a capital nature may be:
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That there is either no tax payable on that part of the Liquidator’s distribution,or
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The shareholder may be able to access various Capital Gains Tax concessions, such as a general 50% discount.
Other benefits of an MVL include:
Section 40-880 will allow the liquidators fees to be deductible over 5 years (20% of the costs in each
year) where:
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The expenditure has not otherwise been taken into account
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A deduction is not denied by another provision, and
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The business was carried on for a taxable purpose
Specifically, Section 40-880(2)(d) provides as follows:
(2) You can deduct, in equal proportions over a period of 5 income years starting in the year in which you incur it, capital expenditure you incur:
(d) to liquidate or deregister a company of which you were a member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business.
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Thereto it is more difficult to reinstate a company which has been degregistered via the MVL process.
Disadvantages of the MVL process:
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It usually takes longer than the deregistration alternative.
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Initially the MVL costs more than applying directly to ASIC for deregistration. However, the potential tax savings from the MVL generally far outweigh this cost.
Which is the best option for you?
When it comes to finalising a solvent company’s affairs, deregistration is quick, easy and cost-effective.
However, the MVL process could present members with substantial benefits that would otherwise not be realised via the ASIC application process.
EZY Debt Solutions facilitate the use of the most up-to-date precedence and expertise to ensure the MVL process runs smoothly.