Using Members Voluntary Liquidation to ‘divvy up’ a family farm

When the directors of a long-established family-owned farming company wanted to go their separate ways in business and divvy up assets in the most tax effective way, a Members Voluntary Liquidation (designed for solvent companies to wind up their affairs once they’re no longer needed) was deemed to be the best solution. Learn more in this case study.

Background

A family-owned company had traded successfully as a farming business for more than 50 years. However, the directors and shareholders of the company, siblings Zoey and Jaxon*, decided to re-establish their own separate farming businesses. As part of this, they wanted to sell off farming land that wasn’t required and have the balance of the land – which was owned by the company and purchased pre-Capital Gains Tax – transferred into their personal names.

Solution

Jirsch Sutherland advised that to take advantage of taxation benefits and minimise tax liability, a Members Voluntary Liquidation (MVL) was the best solution.

At the outset of the appointment, it was decided that the transfer of company-owned land would occur as a non-cash / in specie distribution to Zoey and Jaxon. In order to determine a fair market value, Jirsch Sutherland subsequently arranged for a valuation of the land to be sold off, as well as the two parcels of land to be assigned to Zoey and Jaxon.

The distribution to shareholders, which was determined to be a non-assessable distribution, included:

• in specie distribution of land to Zoey based on fair market value of the land;
• in specie distribution of land to Jaxon based on fair market value of the land; and
• distribution of cash from the proceeds from the sale of the land to both Zoey and Jaxon. The value of the land assigned to Jaxon was higher than the value of the land assigned to Zoey, so to ensure an equal distribution of all company assets to the shareholders, Zoey received a greater cash contribution.

“In the event the property had been sold and the proceeds from the sale (including the assignment of the land) were distributed to the shareholders, if an MVL hadn’t been undertaken, it would have meant the cash component from the sale and the fair market value of the land assigned would have been deemed to be an assessable dividend in the hands of the shareholders, and therefore significant tax would have become payable,” explains Tina Battye, Principal, Jirsch Sutherland.

Results

The parcel of land was sold, cash was distributed among the shareholders, the balance of the land was transferred into their names – all in a tax effective manner – and the company was deregistered. In addition, Jirsch Sutherland applied to Revenue NSW to seek an exemption from transfer duty arising upon the transfer of the land to Zoey and Jaxon, on the basis that the land had been used for primary production between family members. This exemption was granted, which saved over $100,000.

“This matter is an excellent example of the benefits of doing an MVL. It enabled us to realise the cash in the most tax-advantageous way and wind up the company so the shareholders could achieve their individual goals,” says Battye.

*not their real names