Most Read Contributor in Australia, September 2016
By Phillip Vickery, Michael Linehan and David
What you need to know
Changes under the Corporations Amendment (Corporations
Reporting Reform) Act 2010 (the Act) have now
The rules for payment of dividends by companies have
You may need to consider updating constitutions for your
companies, which may contain restrictions on payment of dividends
that are no longer applicable.
The constitution for your company may no longer be in line with
company law – it may provide that a dividend can only be
declared and paid from profits. If so, by making a change to your
company's constitution you may be able to pay dividends in
other circumstances now permitted by the Corporations Act.
Payment of dividends other than out of profits
Previously, a company was entitled to pay dividends only from
profits. The Act has been changed so that a company is now
restricted from paying dividends unless:
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.
What the change means in practice
By the change the requirements have moved away from a
"capital maintenance" to a "solvency based"
approach. This means that dividends may be paid other than out of
The changes made to the Corporations Act 2001 (Cth)
(Corporations Act) may permit payment of
by companies in start-up (without accounting profits); or
where profits have been affected by non-cash expenses (such as
In contrast, a company that has recorded a profit, but which has
a deficiency in net assets will no longer be able to declare a
dividend to its shareholders.
Restriction on payment of dividends by companies limited by
Further, the Corporations Act now contains an express
prohibition that prevents a Company Limited by Guarantee from
distributing dividends to members.
Finally, companies limited by guarantee may now be classified as
"small" and "large" companies under the Act
with different reporting requirements (as is currently the case for
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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