Changes to Corporations Law
rules for payment of dividends
The Corporations Amendment (Corporate
Reporting Reform) Act 2010 (Cth)
received Royal Assent on 28 June 2010
and makes significant changes to the rules
for payment of dividends under the
Corporations Act 2001. Various tax and
other issues may arise from these changes
Companies were previously restricted to paying
dividends out of profits. Section 254T of the
Corporations Act 2001 has now been modified to give
companies more flexibility by replacing the profits test
with a new test that allows a company to pay dividends
if all these conditions are satisfied:
• The company’s assets exceed its liabilities immediately
before the dividend is declared and the excess is
sufficient for the payment of the dividend
• Payment of the dividend is fair and reasonable to the
company’s shareholders as a whole
• Payment of the dividend does not materially prejudice
the company’s ability to pay its creditors.
A company’s assets and liabilities are to be calculated
in accordance with accounting standards in force at the
relevant time (even if the standard does not otherwise
apply to the financial year of some or all of the
companies concerned).
The changes will enable companies that don’t have
accounting profits, such as start-up companies and
some loss companies, to pay a dividend. On the other
hand, profitable companies with negative net assets
will be prevented from paying dividends.
Practical issues arising from the changes
Declaring vs determining
The balance sheet test requires that assets exceed
liabilities immediately before the dividend is ‘declared’.
This implies that dividends must be ‘declared’ rather
than being ‘determined’ by the board before they can be
paid. Determining dividends is increasingly becoming the
common practice for companies because if a final dividend
is ‘declared’, it is a debt owing to the shareholders at the
time it is declared, rather than at the payment date.
Valuation
The excess of assets over liabilities needs to be sufficient
that the payment of a dividend would not materially
affect the company’s capacity to pay its creditors.
Valuation issues are likely to arise as the declaration of
a dividend could be before the preparation of accounts.
Fair and reasonable
The amendments require that the payment of a dividend
is fair and reasonable to the company's shareholders as
a whole. This may be an issue for public companies
with special dividend rights in their constitution and
for proprietary companies that pay differential dividends
to directors.
Company constitution
Company constitutions may currently state
that dividends may only be paid out of profits.
Such constitutions will need to be amended to
take account of these changes.
What are the taxation issues?
There is a consequential amendment to introduce
subsection 44(1A) of the Income Tax Assessment Act 1936,
which provides that a dividend paid out of an amount other
than profits is taken to be a dividend paid out of profits.
As dividends are generally only assessable when they are
paid out of profits, this amendment was necessary to
ensure that companies are not able to pay non-assessable
dividends to shareholders.
 Some other potential tax issues are outlined below. In particular, in paragraph 177EA(17)(ga) one of the
relevant factors to be taken into account in determining
Is the distribution a dividend for tax purposes? the purpose of entering into or carrying out the scheme is
A dividend is broadly defined in subsection 6(1) of the whether a distribution that is made or that flows indirectly
Income Tax Assessment Act 1936 as any distribution under a scheme to the relevant taxpayer is sourced,
made, or any amount credited, by a company to any directly or indirectly, from unrealised or untaxed profits.
of its shareholders excluding amounts debited against This will often be the case, given that the conditions for
the share capital account. Although dividends no longer payment of dividends are now based on a balance sheet
need to be paid out of profits under the Corporations approach. While this factor alone may not result in the
Act 2001, this does not necessarily mean that they will Commissioner exercising his discretion under section
be dividends for tax purposes. If a company with no 177EA, the potential application of this provision will
accounting profits pays a dividend, the journal entries need to be considered, particularly in the context of M&A
to recognise that dividend will be important. If retained transactions where franked dividends are paid before and
profits are credited (even though this may give rise to a after the sale of shares in a company.
negative balance), the dividend will still be a dividend for
tax purposes. If, however, the dividend is debited against Have you considered:
share capital, it will not be a dividend for tax purposes. • The implications of the proposed changes for
your dividend policy?
Franking implications • Practical issues such as valuation and working
Under paragraph 202-45(e) of the Income Tax out if a dividend is fair and reasonable?
Assessment Act 1997, a distribution cannot be • Taxation implications of the changes including
franked where it is a distribution that is sourced from the ability to frank future dividends?
a company’s share capital account. Following on from
the comments made above, where a dividend is paid
where there is no accounting profit, it will be important Contacts:
to understand the accounting entries as these may
determine whether the distribution can be franked. Gary Christie
Partner
Imputation integrity rules Tel: +61 (0) 3 9671 7180
The franking rules contain a number of integrity rules email: gchristie@deloitte.com.au
such as section 177EA of the Income Tax Assessment
Act 1936, which should be considered before declaring Tracey Rens
a dividend. Under section 177EA, the Commissioner has Partner
the power to create a franking debit or cancel a franking Tel: +61 (0) 2 9322 7599
credit, broadly where there is a scheme that was entered email: trens@deloitte.com.au
into or carried out for a purpose of enabling a taxpayer
to obtain an imputation benefit. Michael De Palo
Partner
Tel: +61 (0) 2 9322 5940
email: mdepalo@deloitte.com.au

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