The law about when a company can pay a dividend has recently been changed. A new test has now replaced the requirement that companies must pay dividends only out of profits. Cleardocs has recently updated the company constitution it provides to reflect the law's new flexibility.
You can use Cleardocs to arrange an up to date constitution for a “Pty Ltd” company.Robert Green
The old section 254T required that a dividend be paid only out of the company's profits.
The Cleardocs company constitution used to reflect this, as follows:
Subject to the Corporations Act and any special rights or restrictions applicable to any shares, the directors may declare and pay dividends on shares that appear to them to be justified in light of the profits made by the company.
However, on 5 August 2010, Cleardocs updated its company constitution by deleting this part of the clause and replacing it with the new test set in the new section 254T.
The new section 254T sets out three requirements that must all be met before a dividend can be declared and paid. Under the new law, directors can declare and pay a dividend — regardless of profitability — if:
Obviously, a company's profitability is likely to impact on the directors' decisions about paying dividends — but it's no longer the sole determinant.
The new section 254T also prescribes how assets and liabilities are to be calculated for the purpose of declaring a dividend. The new section states that 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 new requirement for companies to calculate assets and liabilities in accordance with 'accounting standards' may increase the reporting requirements of small companies.
Cleardocs customers should consult their accountants to ensure that they comply with this obligation.
You can update the documents using the Cleardocs Change to Constitution document package.
If your company's constitution (or Memorandum of Association and Articles of Association) contains the old rule, then you will still be able to pay dividends. However:
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Corporate and Commercial Team.
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Andrew is a lawyer in the Maddocks Tax & Revenue team.
Andrew provides advice on:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.