Last year's changes to the rules for company
dividends are back in the spotlight. The Government is considering
both changing the rules and making it clear that dividends can be
used for share capital reductions.
Companies may have to change – yet again –
their procedures for determining and paying dividends.
A year after the centuries-old profits test was replaced by an
assets test, the Government is looking at rewriting the rules
again. One of the options under consideration is bringing back the
Treasury has raised this possibility in a new discussion paper
which looks at:
possible changes to the dividend test;
can a dividend be used to reduce share capital?;
the effect of the balance test on streaming of dividends in
some fixes to accounting and financial reporting requirements
Dividends – the test
Until last year, the law was that dividends could only be paid
out of profits. Amendments to the Corporations Act replaced that
profits test with a balance sheet test. This requires the
company's assets to exceed its liabilities immediately before
the dividend is declared. Assets and liabilities must be calculated
according to the AASB accounting standards.
This raised a number of concerns:
many smaller companies may not have AASB-compliant financial
reports, and so would have to incur extra expense before being able
to decide whether they could declare a dividend;
the balance sheet test doesn't address the issue of
the test is applied as at the date the board
"declares" the dividend, even though current practice is
for the board to "determine" that a dividend is payable
(to avoid the fact that a dividend becomes a debt on the day it is
Treasury is proposing four different policy responses:
keep the current test;
drop the AASB balance sheet test and substitute a
"solvency test" - that the directors are satisfied that
assets will exceed liabilities after the dividend is declared and
that the company will be able to pay its debts as and when they
become due and payable;
replace the balance sheet test with the old profits test;
give companies the option of using the profits test or the
solvency test, and dropping the AASB requirement for companies
which don't have to produce AASB-compliance annual
Treasury is also happy to replace "declare" with
"determine" in section 254T, unless a solvency test is
Can a dividend be used to reduce share capital?
Another problem with last year's amendments was that it was
unclear (to say the least) whether the new dividend rule could be
used to reduce share capital.
Treasury clearly recognises that this is a real problem, but
tries to have a bet each way:
on the one hand, it believes that it's "clear"
that the new rules clearly dividends to be used to reduce share
on the other, it's happy to consider amendments to
"clarify" the point.
What happens if a company is a group cannot satisfy the assets
test? There is a view that dividends cannot be streamed through
such a subsidiary to the parent. Treasury is looking at addressing
The paper also addresses two accounting law problems:
last year's amendment to relieve parents of consolidated
groups from the need to prepare statutory financial statements for
the parent was flawed, because it actually prevented the parent
from including its financial statements even if it actually wanted
to; ASIC put in a temporary fix and Treasury is now looking at
whether section 259(2) should be amended to make that fix
last year's section 323D(2A) allowed a company to adopt a
financial year of less than 12 months if none of the previous five
financial years had been less than 12 months; Treasury is now
looking at how this sits with section 323D(2), which allows
financial years may be seven days longer or shorter than 12
When will it all happen?
The deadline for public comments on the proposals is 30 January
Theoretically, therefore, it's possible that there could be
new dividend rules in place for financial years ending 30 June next
year: it's not completely unknown for new legislation to be
drafted and in place within such a short timeframe.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
Persons listed may not be admitted in all states and
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
This part will cover the legal position in relation to promotional materials and misleading and deceptive conduct.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).