For solvent companies that have ceased trading, particularly those that have made a capital gain through the sale of their business, now is the ideal time to consider a solvent liquidation before the end of the financial year on 31 March. Under New Zealand law, specifically Section CD 26 of the Income Tax Act 2007, companies that have sold their business at a capital profit can distribute that profit tax-free to their shareholders upon liquidation, provided the transaction was conducted at arm’s length.
Why Liquidate Before 31 March?
1. Maximising Tax-Free Distributions
o A solvent liquidation ensures that capital profits from the sale of a business can be distributed tax-free.
o Delaying the liquidation may expose the company to changes in tax laws or other regulatory risks.
2. Avoiding Interest on Overdrawn Current Accounts
o If shareholders have overdrawn current accounts, these attract interest and have tax consequences. By completing the necessary winding up resolutions interest can cease to accrue.
o By liquidating before year-end, shareholders can receive distributions and tidy up tax affairs earlier bringing peace of mind.
3. Reducing Ongoing Compliance Costs
o Even if a company has ceased trading, it still has compliance obligations, including filing GST and income tax returns and maintaining financial records.
o A formal solvent liquidation reduces these obligations, costs and administrative burdens for directors and shareholders.
Solvent Liquidation vs. Short-Form Removal
While a short-form removal from the Companies Register might seem like an easier option, it does not provide the same benefits as a solvent liquidation in all cases.
| Factor | Solvent Liquidation | Short-Form Removal |
| Tax-Free Capital Distribution | Yes, under Section CD 26 | Yes but potential tax implications |
| Creditor Protections | Yes, full disclosure and clearance | No, risk of objections from IRD or creditors |
| Compliance Benefits | Eliminates ongoing filing obligations | May still require some compliance obligations |
| Finality | Ensures proper winding up with formal records and creates a costly barrier for restoration requiring court application | May be reversed if creditors raise concerns and apply for restoration |
Take Action Now
With the financial year-end fast approaching, now is the best time to act. By undertaking a solvent liquidation before 31 March, you can distribute capital gains tax-free, avoid unnecessary compliance costs, and ensure the company is wound up in a structured and compliant manner.
If your company has ceased trading and you want to explore the best strategy for winding it up, contact our team today to discuss the benefits of solvent liquidation before the financial year-end.