Taxing liquidation distributions: An assessment of Australian deemed dividend and capital gains regimes and how they interrelate

Persons who receive distributions of surplus assets in the liquidation of Australian companies may be liable to taxation under either the deemed dividends or capital gains regimes. The deemed dividend regime is now nearly 80 years old and contains many anomalous features. Inappropriately, the legislation prominently excludes the once tax-free, "capital" class of surplus distributions. Several tax jurisdictions comparable with Australia have legislation which is similar. High Court judgements over the years have invented a "character" for liquidation distributions and interpreted that legislation in ways that ill accord with modern commerce. Statutory amendments have not removed all the unhelpful judicial glosses that have intruded. By contrast, the capital gains regime has fewer fictions and better reflects the general law nature of liquidation surpluses. However, a further anomaly arises from the manner by which capital gains are subordinated to deemed dividends for the avoidance of "double taxation". In this article suggestions are made for the drafting of an improved code for the future taxation of liquidation surpluses