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Delaring or paying dividends?

- New rules apply to how your company declares or pays a dividend

Paying dividends is a normal part of company life; generate the profits, pay the tax, and then look at what dividends are available for the shareholders. Changes in the Corporations Act earlier this year mean that directors need to consider a new set of rules before they declare or pay a dividend. Section 254T of the Corporations Act provides the rules governing dividends. In the past, directors needed to ensure that dividends were paid out of profits. This has now changed.

With effect from 28 June 2010, section 254T has been amended and replaces the profit test with three new tests. These new tests are:

1. The company’s assets exceed it liabilities immediately before the dividend is declared and the excess is sufficient for payment of the dividend; and
2. The payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and
3. The payment of the dividend does not materially prejudice the company’s ability to pay its creditors.

As a director you need to consider and satisfy these issues at the time when a dividend is declared and also when the dividend is paid.

At this stage you might be thinking does this really have any practical effect on us? And, in many cases the answer might be no. Certainly as a director, when your company declares or pays a dividend, you are subject to the requirements of the Corporations Act. Get it wrong and you may be explaining your actions to ASIC. But think about what might happen if your company ever got into financial problems and a liquidator was appointed. Then, the liquidator might be interested in identifying any circumstances where the directors had breached their responsibilities. If this occurred you could expose yourself to personal liability. Where tested, the onus would be on the directors to prove that they had met the tests imposed.

Dividends are a normal part of company life. They may be a part of the way you return value to yourself from your company. They may also be used to manage fringe benefits provided by the company, shareholder loan accounts or as an alternative to more traditional forms of remuneration. This will continue. You simply need to be sure at the time when dividends are declared and paid that you satisfy the new tests imposed by the Corporations Act. You also need to be mindful of what your company constitution provides. It may have additional requirements. Where this is the case you will also need to meet these.

If you are declaring dividends ensure you seek professional advice prior to any distribution.  Call Michael today and make an appointment to discuss further.

December 2010 Newsletter Article - Tre Ponte Corporate

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.