Australia reviews dividend regime

In June 2010, Australia’s federal government amended the Corporations Act 2001 (Cth) to replace the profit-based test in section 254T with a three-tiered test for determining whether a company can pay dividends. The introduction of this new test has created significant accounting and tax problems. In response, the government released a discussion paper, Proposed Amendments to the Corporations Act, which canvasses options for reworking these dividend rules. Submissions on the discussion paper closed on 30 January, and further amendments to the legislation may be expected during 2012. The discussion paper suggests various options to overcome the complexities that arise under the current section 254T.

The current test

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 is fair and reasonable to shareholders as a whole; and
• the payment does not materially prejudice the company’s ability to pay its creditors.

The discussion paper

Concerns identified in the discussion paper include:

• linking the dividend test to the accounting standards places an unreasonable burden on those companies that are not otherwise required to comply with the standards;
• an “assets greater than liabilities” test is inappropriate – it has little relationship to solvency because it does not take into account the timing and magnitude of flows of funds;
• use of “declared” in section 254T compared to “determined” in section 254U (if a company’s constitution provides for dividends to be “declared”, and a dividend is declared, the company incurs the debt at that time rather than when the time for payment of the dividends occurs);
• the inter-relationship between the dividends test and the capital maintenance requirements in chapter 2J of the Corporations Act – that is, whether paying a dividend in a manner that complies with section 254T can be out of share capital, or whether the requirements in chapter 2J dealing with returns of share capital, including shareholder approval, must be satisfied; and
• the interaction of section 254T with the franking credit rules in the tax law – that is, whether a dividend that creates or increases a deficiency of net assets below share capital is frankable for tax purposes.

Michael Sheng is a partner at Blake Dawson in Shanghai, and Elizabeth Pakchung is a partner at Ashurst in Sydney