Since publishing this article the ATO has published an edited private ruling that a liquidator’s distribution of the cashflow boost will be deemed a dividend of income which may be assessable to the shareholder, rather than tax-free capital.
Did your business receive cash flow boost payments as part of the government’s COVID-19 business support measures? As well as helping companies manage cash flow, these handouts were designed to ensure employees were kept on.
If you did and you’ve now sold your business, restructured your group entities, or otherwise no longer require your company, you may be able to access the cashflow boost as a tax-free distribution through a members’ voluntary liquidation (MVL).
What's an MVL?
Members’ voluntary liquidation is a way of dissolving and deregistering a solvent company that is no longer required. It’s a formal appointment which means appointing a liquidator to allow shareholders to access tax benefits for a company with capital gains and other reserves.
Prior to appointing a liquidator for an MVL, a company’s creditors should be paid, tax lodgements should be finalised, and the shareholders may withdraw any cash in proportion to their shareholdings, with those loans to be distributed in-specie in the MVL.
When the liquidator has obtained ATO tax clearance and distributed the company’s assets to shareholders, company shares are cancelled on deregistration of the company.
Distributions to Shareholders – Accessing Tax Benefits in an MVL
The tax treatment of distributing various equity reserves can be beneficial in an MVL. Due to the cancellation of the company’s shares at the conclusion of the process, various reserves, that would otherwise be treated as dividends in the hands of shareholders, instead may be tax-free capital distributions.
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So, Where do Cash Flow Boost Reserves Sit?
Because cash flow boosts are tax-free, non-accessible, non-exempt (NANE) income, any cash flow boost reserves will also be treated as capital in an MVL.
The result is that any cash flow boost reserves can be paid tax-free in your shareholders’ hands!
Summary
The tax treatment of various reserves is as follows:
| Reserve Account | Ordinary Treatment | MVL Treatment |
| Paid-up share capital | Capital | Capital |
| Retained Earnings (from income) | Dividend | Dividend |
| Capital reserves - pre-CGT | Dividend | Capital |
| Capital reserves - post-CGT subject to small-business CGT concessions | Dividend | Capital |
| Cash flow boost reserve | Dividend | Capital |
Keep Cash Flow Boost Surplus Clear on Your Balance Sheet
To ensure tax-effective treatment of the above reserves, it’s important that they are correctly classified before appointing a liquidator. If you have cash boost reserves in your business and you’re considering members voluntary liquidation, make sure it’s accounted for separately on the balance sheet.
This will allow your liquidator to distribute any surplus cash flow boost to you in a tax-effective way – less for the taxman, more for you.
If you’re looking for further guidance on accessing your company’s funds in a tax-effective manner, or to proceed with an MVL, get in touch with our experienced team of specialists and liquidators today on 1800 861 247, or see how we can help with our Instant Online Assessment.
