Employment Law: Assisting in the Rebuild of Christchurch

The recent seismic activity in Christchurch has had a devastating effect on the city centre, as well as the outer suburbs, which have caused some businesses to grind to a halt in their operations. With the outlook brightening and the attitude of Cantabrians positive, and a general consensus that the worst was over after the initial September 2010 earthquake and the declining aftershocks, the 22nd February event caught all unaware. With the immediate concern of saving lives, homes and returning essential services back to the community, especially those in the worst hit Eastern regions, the focus has now turned to the rebuilding of a stronger and more vibrant Christchurch.

With the impetus now of economic recovery and the physical rebuild of the city, there are some positive signs that the local economy is starting to bounce back; built on the sweat and tears of Cantabrians who are trying to save their businesses and their employees in positions on employment. However, many businesses, especially in the Central Business District (CBD) have either been damaged beyond repair, or are unable to be accessed due to the cordons limiting admittance to the area. However, as each day passes, new areas of the CBD are reopened for business owners and residents to retrieve valuable business equipment and information; and other areas are opened for full access throughout the city. It may be hard to vision at this point in time, but it should be remembered that Christchurch will be rebuilt, and these businesses will once again thrive. New construction will provide for those whose buildings have been irreparably damaged and from the rubble, will form a new, stronger and more vibrant Christchurch, being built on the memories of those who lost their lives in the tragic event.

The immediate future of many people in respect to their employment is now becoming the focus of concern, with large government packages being released to assist affected businesses, the self employed, as well as those who have lost their jobs and are experiencing hardship. Businesses who have experienced substantial losses and are contemplating their next move, however, must still adhere to the legal framework for civil and criminal law. Where the red tape has been considered by many as the legal loopholes they have to jump through, in times like these, Employment Law and those specialising in its application, can be a savings grace; ensuring that all your decisions in these hard times are legally correct.

The last straw for an employer is to find that they have inavertedly done something illegal in respect to their roles, relationships and responsibilities towards their employees during their efforts to save their business. Ensure that you are conducting your business actions according to current employment law and safeguard the future of your business in the new Christchurch.

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Members' Voluntary Liquidation Vs De-registration

As a result of the current harsh economic climate there has been a notable increase in the amount of businesses, and consequently business owners, that are having to reconsider the way in which the business is currently operating. Unfortunately, for many small to medium enterprise operators they are having to reassess whether or not it is financially viable for the business to continue functioning at all.

There are various options for a business that finds it is no longer able to trade such as Members' Voluntary Liquidation or de-registration. The best option for each individual situation is different, which is why it is important to note that choosing the wrong method could prove to be a costly decision. Making the correct choice is not only important in terms of the initial monetary cost to the business but also in relation to the tax implications of each.

Members' Voluntary Liquidation refers the process of winding up a solvent company. This means that the business is in a financial situation where it is able to pay its debts if and when they are due prior to the execution of the liquidation process.

De-registration is the formal process of removing a company from the Australian Securities and Investments Commission (ASIC) register of companies. The removal usually takes place following the completion of Members' Voluntary Liquidation. However, provided that the following conditions are met a company can be de-registered without first going through the liquidation process.

If:

-all company members agree to the De-registration -the company is not carrying on business -its assets are worth less than $1000 -all company fees and penalties payable under the Corporations Act have been paid -there are no outstanding liabilities, and -the company is not a party to any legal proceeding -then De-registration can take place.

Whilst from a cost-to-the-business perspective Member's Voluntary Liquidation is more expensive, when viewed from a taxation perspective there are many benefits, particularly to the shareholder, when using the Members' Voluntary Liquidation method.

For example, the winding up of a company will no doubt result in the necessary distribution of its accumulated profits and capital reserves to the company's shareholders. If the distribution of the assets is done via a liquidator there are specific tax provisions and capital gains tax regimes that are applied, proving advantageous for the shareholders. Conversely, if the assets are distributed without the use of a liquidator the usual tax provisions in relation to shareholder dividends apply.

The basic application of this can be demonstrated using the following simplified example.

Holiday Getaway Pty Ltd was incorporated in 1984 with $100 in share capital. The shareholders, Sally and Alex were allotted 50 shares each. In the same year Sally and Alex lent $500,000 to the company in order for it to purchase a property. Years later, property was sold for $950,000. This is a capital-gain of $450,000 for the company. After repaying all of its debts the company has approximately $400,000 in the bank at the time that Sally and Alex decide to wind-up the company.

Using the De-registration option, Holiday Getaway Pty Ltd are required to distribute the remaining cash to Sally and Alex before De-registration can occur. Apart from the initial $100 that was invested in the company, the rest of the cash is considered an unfranked dividend and will be taxed as such. Based on the top marginal tax rate of 45% there will be $179,955 owed in tax on the remaining $399,900.

If Holiday Getaway Pty Ltd elects to undertake the process of Members' Voluntary Liquidation the distribution of assets will be tax-free to Sally and Alex.

As demonstrated in the above example there can potentially be significant tax benefits to the shareholders of a company if Members' Voluntary Liquidation is implemented. However this may not be the optimal outcome for every situation. It is also necessary to consider the administration, legal and other costs associated with this process. This is why it is increasingly important that you seek the advice of professional accountants and lawyers when considering winding-up your company.

At The Quinn Group we have a team of highly qualified lawyers and accountants who will be able to advise you on the best method for your situation. If you require advice on the winding-up of your company or would like more information please contact us on 1300 QUINNS or submit an online inquiry form.

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