Declaring or paying dividends?

14 December 2010

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. However you need to be aware that new rules apply to how your company declares or pays a dividend.

Changes to the Corporations Act

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:

• The company’s assets exceed it liabilities immediately before the dividend is declared and the excess is sufficient for payment of the dividend; and
• The payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and
• 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.

Get it wrong and you may be explaining your actions to ASIC

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. You also need to be mindful of what your company constitution provides as these may conflict with the new provisions.

Getting it wrong may mean you could expose yourself and other directors to personal liability.

Talk to your accountant

For more information about the changes to dividend tests, contact us on 02 9957 4033 to discuss your business circumstances.

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