I found this on a web site about inspecie implications.
Implications for company mce-anchorFrom the company’s perspective, an in specie distribution will attract the application of CGT event A1. Assuming the asset distributed is post-CGT, the company may make a capital gain or loss on the distribution depending on the cost base of the asset and its market value at the time of the distribution.
The 50% CGT discount will not be available to reduce any capital gain made by the company.
mce-anchorThe company may, however, be able to access some of the small business concessions contained in Division 152 of the Income Tax Assessment Act 1997 (“ITAA 1997”) provided the asset is an “active asset”, the net value of assets owned by the company and related entities is less than $5 million and other relevant conditions for relief are satisfied.
Some in specie distributions of particular types of assets are subject to special rules:
Trading stock. An in specie distribution of trading stock would not result in a capital gain for the company because of section 118-25. However, this would constitute a disposal outside the ordinary course of business and section 70-90 would require the company to include the market value of the trading stock in its assessable income.
Depreciable plant. An in specie distribution of plant will not attract capital gains tax consequences pursuant to section 118-24. However, a balancing adjustment may arise under the capital allowance provisions.
Implications for shareholders Income tax
The income tax implications for shareholders are identical regardless of whether a liquidator’s distribution is in specie or cash.
Interim or final distributions made by liquidators of a company are deemed to be dividends under section 47 of theIncome Tax Assessment Act 1936 (“ITAA 1936”) to the extent to which they represent income derived by the company other than income which has been properly applied to replace a loss of paid-up share capital.
To minimise the amount of the deemed dividend that is included in the assessable income of shareholders, a liquidator should aim to source distributions out of funds that will not result in a deemed dividend under section 47. These include paid-up share capital and pre-CGT capital profits reserves.
Where a company makes an in specie distribution, it may make a capital gain as discussed above. Liquidator’s distributions sourced from that capital gain would be treated as deemed dividends under section 47. This is because subsection 47(1A) extends the concept of income under section 47 to include capital gains calculated without indexation and not taking into account any capital losses.
However, any part of a capital gain made by the company that is sheltered by the small business CGT concessions will not represent income derived by the company for the purposes of section 47.
A deemed dividend under section 47 is frankable. Capital gains tax
Interim and final distributions made by liquidators may also attract CGT consequences for shareholders.
Assuming all of the shares in a company are post-CGT, where an interim distribution is made by a company, CGT event G1 will happen to the extent that the distribution is not a deemed dividend under section 47. CGT event G1 targets non-assessable returns of capital.
Any part of a distribution taken into account for the purposes of CGT event G1 will reduce the cost base of the shares held by the shareholder that receives the distribution. If the distribution exceeds the cost base of the shares, then a capital gain equal to the excess will be included in the shareholder’s assessable income.
However, CGT event G1 does not apply to a distribution where the company is dissolved within 18 months of that distribution.
Where that occurs, the interim distribution will instead be treated as part of the consideration received by a shareholder in respect of CGT event C2 happening. This event occurs when ownership of an asset ends, for example, by the asset being cancelled. Upon liquidation of a company, the shares owned by a shareholder will be cancelled giving rise to either a capital gain or loss.
The capital proceeds used in calculating any capital gain or loss under CGT event C2 will include the market value of property distributed in specie by the company to the shareholder.
The 50% CGT discount may apply in respect of a capital gain that arises under either CGT events G1 or C2 provided the shareholder is an individual, a trust or a complying superannuation entity and the shares have been held in the company for more than 12 months. Regard should also be had to section 115-45, which will deny the 50% CGT discount essentially where the majority of the assets owned by the company at the time of the CGT event were acquired within the last 12 months.
The small business CGT concessions in Division 152 of the ITAA 1997 may also be available provided the relevant conditions for relief are satisfied. For example, the shares in the company must be active assets and the net assets of the shareholder and any related entities must not exceed $5 million.
To avoid double taxation, if a deemed dividend under section 47 and a capital gain under CGT events G1 or C2 are included in a shareholder’s assessable income, section 118-20 will operate to reduce the capital gain to the extent that the amount is otherwise included in the shareholder’s assessable income (excluding any imputation credits attached to the deemed dividend under section 47).
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