The Cost of Closing a Business: Company Wind Up Process & Tax Costs
Closing a business is a significant decision that comes with financial and administrative obligations. Whether you’re winding up a company voluntarily or due to financial difficulties, understanding the costs involved can help you plan effectively. This article covers the tax implications for companies with retained earnings and the process of winding up a business in New Zealand.
Tax Implications for Companies with Retained Earnings
One of the key financial considerations when closing a business is handling retained earnings. If your company has accumulated profits that haven’t been distributed to shareholders, you may face tax liabilities upon closure. Here’s how:
Dividend Tax: Any retained earnings distributed to shareholders before closure are typically classified as dividends and taxed at the recipient’s personal tax rate. This impacts shareholders who receive these funds, as they may need to account for additional personal income tax. If you have significant retained earnings in your accounts, this may affect you.
Liquidation Distribution: If earnings are distributed during the liquidation process, they may be treated as dividends or capital distributions. If classified as dividends, resident withholding tax (RWT) may apply.
Final Tax Returns: Before deregistration, the company must file a final income tax return with Inland Revenue (IRD), ensuring all tax obligations are met, including GST and PAYE if applicable.
Imputation Credits: If the company has imputation credits, these can be used to offset tax on final distributions, reducing the overall tax burden.
Losses Are Forfeited: If your company has accumulated tax losses, these will be lost upon deregistration. This means any carried-forward losses that could have been used to offset future profits will no longer be available. If you anticipate future business activities where these losses might be useful, consider alternative options before closing.
If you’re unsure how dividend tax may impact you, we can review your accounts and estimate the tax cost for you before proceeding with the wind-up process.
Costs Involved in Winding Up a Company
There are additional fees for managing the wind-up process. If a formal liquidation is required, this incurs higher costs through a third party. While we don’t provide liquidation services, we can refer you to someone who can help.
Process of Winding Up a Company in NZ
We prepare the wind-up financial statements and tax returns, along with additional minutes to support your company wind up then follow this process:
Communication with the IRD:
All final tax returns are submitted, including income tax, GST, and PAYE.
We then obtain IRD approval for deregistration (this can take at least three weeks for a response).
Application via the Companies Office:
Once IRD approval is received, we apply for voluntary removal from the Companies Register.
If liquidation is required, a liquidator must be appointed to manage the process.
Final Steps Before Closure:
Close Business Bank Accounts: Once all financial obligations are settled, including final tax payments and refunds, close the company’s bank accounts.
Cancel Subscriptions and Contracts: Ensure all ongoing business expenses, such as software subscriptions, leases, and supplier agreements, are cancelled.
Notify Customers and Suppliers: If applicable, inform key stakeholders of your business closure to ensure a smooth transition.
Retain Important Business Records: Keep copies of financial statements, tax returns, and other key records for at least seven years in case of future queries.
Final Thoughts
Closing a business involves more than just stopping operations—it requires careful planning to manage tax obligations and compliance requirements. Seeking professional advice can help ensure the process is handled correctly, minimizing costs and tax burdens.
If you’re considering winding up your business, please get in touch to explore the best approach based on your company’s financial position.