08 Dec 2011
Picking up the dividend pieces
by David Landy
Last year's changes to the rules for company dividends are back in the spotlight. The Government is considering both changing the rules and making it clear that dividends can be used for share capital reductions.
Companies may have to change – yet again – their procedures for determining and paying dividends.
A year after the centuries-old profits test was replaced by an assets test, the Government is looking at rewriting the rules again. One of the options under consideration is bringing back the profits test.
Treasury has raised this possibility in a new discussion paper which looks at:
possible changes to the dividend test;
can a dividend be used to reduce share capital?;
the effect of the balance test on streaming of dividends in groups; and
some fixes to accounting and financial reporting requirements for companies.
Dividends – the test
Until last year, the law was that dividends could only be paid out of profits. Amendments to the Corporations Act replaced that profits test with a balance sheet test. This requires the company's assets to exceed its liabilities immediately before the dividend is declared. Assets and liabilities must be calculated according to the AASB accounting standards.
This raised a number of concerns:
many smaller companies may not have AASB-compliant financial reports, and so would have to incur extra expense before being able to decide whether they could declare a dividend;
the balance sheet test doesn’t address the issue of solvency; and
the test is applied as at the date the board "declares" the dividend, even though current practice is for the board to "determine" that a dividend is payable (to avoid the fact that a dividend becomes a debt on the day it is declared).
Treasury is proposing four different policy responses:
keep the current test;
drop the AASB balance sheet test and substitute a "solvency test" - that the directors are satisfied that assets will exceed liabilities after the dividend is declared and that the company will be able to pay its debts as and when they become due and payable;
replace the balance sheet test with the old profits test; or
give companies the option of using the profits test or the solvency test, and dropping the AASB requirement for companies which don’t have to produce AASB-compliance annual accounts.
Treasury is also happy to replace "declare" with "determine" in section 254T, unless a solvency test is introduced.
Can a dividend be used to reduce share capital?
Another problem with last year's amendments was that it was unclear (to say the least) whether the new dividend rule could be used to reduce share capital.
Treasury clearly recognises that this is a real problem, but tries to have a bet each way:
on the one hand, it believes that it's "clear" that the new rules clearly dividends to be used to reduce share capital;
on the other, it's happy to consider amendments to "clarify" the point.
What happens if a company is a group cannot satisfy the assets test? There is a view that dividends cannot be streamed through such a subsidiary to the parent. Treasury is looking at addressing this problem.
The paper also addresses two accounting law problems:
last year's amendment to relieve parents of consolidated groups from the need to prepare statutory financial statements for the parent was flawed, because it actually prevented the parent from including its financial statements even if it actually wanted to; ASIC put in a temporary fix and Treasury is now looking at whether section 259(2) should be amended to make that fix permanent;
last year's section 323D(2A) allowed a company to adopt a financial year of less than 12 months if none of the previous five financial years had been less than 12 months; Treasury is now looking at how this sits with section 323D(2), which allows financial years may be seven days longer or shorter than 12 months.
When will it all happen?
The deadline for public comments on the proposals is 30 January next year.
Theoretically, therefore, it's possible that there could be new dividend rules in place for financial years ending 30 June next year: it's not completely unknown for new legislation to be drafted and in place within such a short timeframe.