Paying dividends is an important part of managing any company but this simple process is complicated by many rules that business owners need to contend with, including the company constitution, the tax law and the corporations law.
Before paying dividends, directors and executives should consider compliance and answer a number of key questions, being:
Q. What rules are in the company's constitution that govern dividend payments?
Q. Does the company have sufficient net assets to support the proposed dividend?
Q. Are the net assets determined in accordance with accounting standards?
Q. Will the proposed dividend prejudice the ability to pay creditors?
Q. How will the dividend be recorded in the company's ledgers?
Q. What franking credits are available for the dividend?
Q. Will the dividend qualify for franking?
Q. What is the timing of the dividend declaration and payment?
Given the myriad of rules that apply, directors and executives should seek professional advice before proposing, declaring or paying dividends to ensure that the company avoids a breach of the Corporations Act 2001 that could expose the directors to personal liabilities.
The ATO has confirmed their opinion that franking credits are not available until the company's income tax (or PAYG Instalment) has been assessed and paid. It is important to consider the available franking credits at the time of paying the dividend to ensure the dividends are not under or over franked which may lead to adverse tax consequences for the company.
The Commonwealth Government has also introduced deregulation reforms in the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 that are aimed at increasing the flexibility of companies to pay dividends. The period for submissions regarding the changes introduced by this bill closed on 16 May 2014, however, given the speed of the machinery of government, we consider it unlikely that these changes will be implemented before 30 June 2014.