On 10 April 2014, the exposure draft of the Corporations
Legislation Amendment (Deregulatory and Other Measures) Bill
2014 was released for comment. The Bill is part of a package
of measures introduced by the Government to repeal and streamline
the Corporations Act 2001 (Cth) and reduce compliance costs for
The Bill proposes a new test for the payment of dividends which
may necessitate changes to a company's constitution and board
The consultation period ends on 16 May 2014 and the Bill is
expected to be introduced in the 2014 Autumn/Winter Sittings of
The current test
Section 254T of the Corporations Act (which has been law since
28 June 2010) is a net assets test and provides
that a company must not pay a dividend 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;
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.
However, the existing net assets test is arguably not an
effective measure of a company's solvency.
Prior to this test a dividend could only have been paid out of
the profits of the company.
The new test
The Bill proposes replacing the above three limb test with a
pure solvency test. The proposed new section 254T
"A company must not declare a dividend unless, immediately
before the dividend is declared, the directors of the company
reasonably believe that the company will, immediately after the
dividend is declared, be solvent.
A company must not pay a dividend unless, immediately before
the dividend is paid, the directors of the company reasonably
believe that the company will, immediately after the dividend is
paid, be solvent."
The new provision clarifies that (b) above will not apply to a
dividend that is declared.
The new test is to be welcomed as a much simpler test. The
proposed new section 254T also removes some of the practical
difficulties with the current test (for example, see below in
relation to capital reductions). It will also reduce compliance
costs in calculating a company's assets and liabilities in
accordance with accounting standards, particularly for those
companies that are not required to prepare audited financial
Clarification of the reduction of capital rule
The current test does not permit a distribution that amounts to
a reduction of share capital. Chapter 2J of the Corporations Act
imposes additional conditions on such reductions (capital
maintenance provisions), particularly the requirement to obtain
The proposed section 254TA provides that a "company may
reduce its share capital by declaring or paying a dividend, if (a)
the dividend is declared or paid, as the case may be, in accordance
with section 254T; and (b) the reduction in share capital is an
equal reduction." Therefore, the new test exempts dividend
payments from the capital maintenance provisions to the extent that
they are "equal reductions" in capital as opposed to
"selective reductions" which may benefit some
shareholders more than others.
The new test is much simpler and expands the circumstances in
which a company can pay a dividend. The change may also assist in
facilitating corporate restructures via in specie
distributions of shares without shareholder approval.
The proposed changes are not intended to change existing company
taxation arrangements. However, if implemented, companies will need
to carefully consider the taxation implications of paying a
dividend other than out of profits.
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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