Pro­posed new rules for pay­ing dividends

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In Brief

If passed in Par­lia­ment, the Cor­po­ra­tions Leg­is­la­tion Amend­ment (Dereg­u­la­to­ry and Oth­er Mea­sures) Bill 2014 may sim­pli­fy the process of declar­ing and pay­ing div­i­dends and reduce com­pli­ance costs for SME busi­ness­es. In this arti­cle we take a look at the cur­rent and pro­posed new rules for pay­ing dividends.

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Introduction

If passed in Par­lia­ment, the Cor­po­ra­tions Leg­is­la­tion Amend­ment (Dereg­u­la­to­ry and Oth­er Mea­sures) Bill 2014 may sim­pli­fy the process of declar­ing and pay­ing div­i­dends and reduce com­pli­ance costs for SME businesses.

The cur­rent rules for pay­ing dividends

The cir­cum­stances under which a com­pa­ny can cur­rent­ly declare and pay a div­i­dend are con­tained in sec­tion 254T of the Cor­po­ra­tions Act 2001 (Cth).

Intro­duced in 2010, this law marked a sig­nif­i­cant depar­ture from the old ​‘prof­its test’. How­ev­er, in prac­tice this law has been prob­lem­at­ic, par­tic­u­lar­ly for SMEs.

Sec­tion 254T requires that a com­pa­ny pass the fol­low­ing tests in order to declare a dividend:

• Net assets test;
• Fair­ness test; and
• Cred­i­tor test.

The net assets test requires that cur­rent account­ing stan­dards are fol­lowed, and these may involve more oner­ous report­ing stan­dards than many SMEs pre­vi­ous­ly adhered to or required. This has increased the costs of compliance. 

As an addi­tion­al prob­lem, some com­pa­ny con­sti­tu­tions still con­tain a pro­vi­sion that div­i­dends can only be paid out of prof­its. There­fore in effect, these com­pa­nies have had to sat­is­fy four sep­a­rate tests before declar­ing a dividend.

The pro­posed new rules

The pro­posed changes replace all of the pre­vi­ous tests with a sim­ple sol­ven­cy test.

Under the pro­posed law, a com­pa­ny can­not declare or pay a div­i­dend unless, imme­di­ate­ly before the dec­la­ra­tion or pay­ment, the direc­tors of the com­pa­ny rea­son­ably believe that after the dec­la­ra­tion or pay­ment, the com­pa­ny will be solvent.

Our View

Impor­tant­ly, the test for sol­ven­cy is far broad­er than the pre­vi­ous tests. It fol­lows that under the new law, the process of declar­ing div­i­dends will be far less com­plex or expensive.

We also believe that the sol­ven­cy test will be more amenable to the com­mer­cial real­i­ties of the cash flows com­mon­ly expe­ri­enced in SME businesses.

It is expect­ed that the Bill will be intro­duced in the 2014 Win­ter ses­sion of Parliament.