August 2010

Corporations reporting reforms: important changes to rules for payment of dividends

The Corporations Amendment (Corporations Reporting Reform) Act 2010 (Act) came into effect on 28 June 2010.

The Act implemented a number of changes to the Corporations Act 2001 (Cth) 2001 including changes to how dividends can be declared and paid by a company.

Changes to Dividend Payments

Previously, Section 254T of the Corporations Act provided that a company could only declare and pay dividends out of its profits.

The Act has amended Section 254T of the Corporations Act to replace the 'profits test' with a new test that requires the following conditions to be satisfied before a company can declare and pay a dividend:

  • the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the 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.

For the purpose of determining whether the assets of a company exceed its liabilities, the company must calculate its assets and liabilities in accordance with accounting standards in force at the relevant time (even if the standard does not otherwise apply to the financial year of some or all of the companies concerned).

Additionally, in determining whether or not the above conditions are satisfied, directors of a company should bear in mind their overriding duty (under Section 588G of the Corporations Act 2001) to prevent the company from insolvent trading.

How do the changes affect you?

The proposed changes give companies greater flexibility to pay dividends provided that conditions stated above are satisfied.

For example, a company with sufficient net assets but insufficient profit will now be able to pay a dividend. This change has the reverse impact in that if a company does not have sufficient net assets, but has profits, it will not be able to declare a dividend.

The assets and liabilities test may impose an additional accounting burden on small proprietary companies. Small proprietary companies are not, other than in certain circumstances, required under the Corporations Act to prepare accounts that comply with the Australian Accounting Standards. If a small company wants greater certainty that its assets exceed its liabilities, it may need to seek professional advice which would, necessarily, involve further expense.

Most standard constitutions for companies have a clause that only permits payment of dividends out of the profits of the company.

Should you wish to take advantage of the amendments to the Section 254T of the Corporations Act, you may need to amend the terms of the constitution of your company to mirror the changes to Section 254T.

If you would like further advice regarding the application of Section 254T of the Corporations Act or assistance to prepare the documentation required to amend your company's constitution, please contact Bartier Perry.