Page 270 - DCOM508_CORPORATE_TAX_PLANNING

Unit 11: Tax Planning for Liquidation

Notes
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Caution Cannot use a distribution in the course of winding up reducing or avoiding the
surcharge on the pre-winding up income.
Therefore, a close company should ensure that it has no undistributed income which could
give rise to a surcharge before deciding to wind-up.

Section 434(7) provides that a close company surcharge cannot arise where the company
cannot legally make a distribution for a period. When a company is in liquidation it cannot
legally make a distribution of any income earned during the liquidation and therefore no
surcharge should apply. One exception to this is in the case of voluntary liquidations. In the
case of a voluntary liquidation, the company can apply to the High Court to be removed
from liquidation, thereby removing the legal impediment to making the distribution.
6. Cessations: The appointment of a liquidator does not necessarily mean the cessation of a
trade. Whether or not the trade has ceased will be a matter of fact. If the trade has ceased
then the normal cessation rules apply. When a liquidator is appointed to a company they
will often negotiate with creditors to only pay. If the balance written off does not relate
to a trading balance then Section 87 will not apply and you need to decide, based on fi rst
principles, if income tax under another Schedule or capital gains tax will apply.

Example: R Limited held a 35% interest in S Limited. During the year, S Limited went
into liquidation owning 250k to R Limited. As part of the liquidation process the freehold interest
in a site was transferred to R Limited in settlement of the outstanding liability. The market value
of the site at the date of transfer was 500k.
A distribution in specie on a liquidation is treated as a mere conveyance for stamp duty purposes
(and therefore exempt as it does not fall within any of the heads of charge in Schedule 1, SDCA
1999) unless the shareholder provides any form of consideration for the asset acquired. The
assumption or waiver of a debt is treated as consideration under Section 41, SDCA 1999. R
Limited is therefore liable to stamp duty of 250k (i.e. the amount of the debt outstanding from
Limited at the date of liquidation) at a rate of 6% as a conveyance on sale (i.e. liability of 15k).
At general law, distributions made by a liquidator on the winding up of a company are a receipt
of capital, not a dividend. However, subsection 47(1) of the Income Tax Assessment Act 1936
(ITAA 1936) deems a liquidator’s distribution to be assessable as dividends to the extent that it
represents income derived by the company. Subsection 47(1A) specifies that income is income

according to ordinary concepts and statutory income including capital gains (but ignoring capital
losses). Despite the fact that capital losses are ignored under subsection 47(1A), in most cases
there will be no practical impact because only the amount actually available for distribution will
be a dividend. A deemed dividend under subsection 47(1) is frankable.

Task Take a company of your choice and study its tax implications while liquidation.

Self Assessment

Fill in the blanks:

13. A new period of assessment starts at the commencement of the ………………..
14. Section 26(2) provides that a company in liquidation remains chargeable to corporation tax
on its…………….

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