Proposed new rules for paying dividends
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.
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.
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.