Dividends out of capital now permitted for solvent companies
One of the most important advantage a trust structure has over a company is that capital can be returned to investors. However, on 24 June 2010 the Corporations Amendment (Corporate Reporting Reform) Bill 2010 (Cth) (the Bill) was passed replacing the capital maintenance rule that a company could only pay dividends out of profits.
Under the new Section 254T a company will not be able to declare a dividend unless:
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its assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the dividend payment
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the payment of the dividend is fair and reasonable to the company's shareholders as a whole, and
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the payment of the dividend does not materially prejudice the company's ability to pay its creditors.
Assets and liabilities will be calculated in accordance with the accounting standards in force at the relevant time the dividend is declared. Solvency of a company can be determined by reference to the accounting records it is required to keep under section 286 of the Corporations Act.
What happens to the Share buy-back rules?
The procedures and rules for other share capital reductions and buy-backs in Part 2J of the Corporations Act remain unchanged and the duty placed on directors to prevent insolvent trading in Section 588G will continue to apply.
Our Constitution were updated soon after the law was amended; click here to purchase a company from us for only $482 including $412 ASIC fees and GST.
Amendment to Income Tax Act
Consequential amendments to section 44 of the Income Tax Assessment Act (1936) (Cth) deem distributions paid by a company under the new section 254T to be out of "profits" for the purposes of Australia's income tax law.
Practical Problems
Advisor must now consider the following problems before declaring a dividend from capital of the company:
1) Shareholders and directors of private small company (proprietary company) when assessed on receipt of dividend will have difficulty in choosing if a distribution received is either income under section 254T or capital under Part 2J
2) To satisfy the new Section 254T, a small proprietary company director would have to decide to apply all the accounting standards in order to determine when paying a dividend out of the capital of the company.
3) Extra cost will be incurred by small business, as now the directors of a small proprietary company would be responsible to improve the quality of financial reporting obligations under the Corporations Act 2001 (Cth).
Click here to purchase a company for $482 including $412 ASIC fees and GST.
What are the other changes?
The Bill also introduces a number of other key measures to improve Australia's corporate reporting framework. These measures will impact on a range of entities registered under the Corporations Act.
Now, what do you need to worry about?
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Consider how the new Section 254T will impact on how you prepare reports for the 30 June 2010 Financial Year (and thereafter) for your company.
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Plan how the new Section will apply to any proposed reductions of capital or planned dividends payments.
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Review your company constitutions to ensure they are consistent with the new laws.
What to do next?
We updated our constitution to give effect to the above change and for $70 including GST, you are able to purchase the new constitution for all your company clients.
To purchase our new constitution, simply log in and start creating a new company and do not tick "Register with ASIC" box, you will then be asked to enter the Australian Company Number (A.C.N) of your existing company. After payment by credit card, our new constitution can be used by your existing company once all the directors have passed a resolution in favour, in a general meeting.
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