Treasury proposed amendments to dividend provisions

Articles Written by John Keeves (Partner)

On 28 November 2011, Treasury issued a Discussion Paper in response to, among other things, concerns about the new dividend provisions inserted into the Corporations Act by the Corporations Amendment (Corporate Reporting Reform) Act 2010.

There have been a number of difficulties with the application and interpretation of the new dividend provisions in section 254T, as well as difficulties in relation to applying the taxation legislation to dividends not paid out of profits and dividends paid out of profits where there are prior year losses (see the October 2011 edition of Acumen).

Treasury is proposing four options for dealing with the dividend test:

  • retaining section 254T as currently drafted;
  • adopting a solvency test;
  • reinstating the former "profit" test;
  • adopting an arrangement under which a company could have a choice of two ways of determining whether it is able to pay a dividend - a "profits" test and a "balance sheet" test.

The Discussion Paper does seek to address some of the drafting difficulties (for example, the use of the expression "declaring" when the company constitutions generally provide for the Board to "determine" that dividends are payable, rather than "declaring" a dividend) and clarifying that section 254T is an exception to the capital maintenance doctrine.

The Discussion Paper also refers to the taxation issues with dividends and, in particular, the ability to frank dividends out of curent year profits if the assets are less than share capital. The discussion paper suggests that this would be dealt with through a public taxation ruling, but it is not clear what the content of the ruling might be.

Submissions are due by 30 January 2012. Download the discussion paper here.

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