On 14 December 2012, the Australian Government released an exposure draft Bill, the Corporations Legislation Amendment (Remuneration Disclosures and Other Measures) Bill 2012 (Bill), which proposes amendments to section 254T the Corporations Act 2001 (Cth) (Act). Section 254T deals with the requirements to enable a dividend to be declared or paid.

Originally, section 254T simply required a dividend to be paid out of profits. From 28 June 2010 the section was amended so that a dividend could only be paid if:

  • The company's assets exceeded its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend
  • The payment of the dividend is fair and reasonable to the company's shareholders as a whole
  • The payment of the dividend does not materially prejudice the company's ability to pay its creditors.

Assets and liabilities are to be calculated in accordance with the accounting standards (whether or not the company is required to prepare a financial report).

The proposed amendments:

  • Retain the assets test but apply it immediately before the declaration of a dividend or, if the dividend is not declared, immediately before it is paid
  • Remove the requirement that the payment of the dividend is fair and reasonable to the company's shareholders as a whole
  • Remove the requirement that the payment of the dividend does not materially prejudice the company's ability to pay its creditors, but substitutes a requirement that the directors of the company reasonably believe that the company will, immediately after the dividend is declared or, if not declared, paid, be solvent
  • Allow companies that are not required to prepare a financial report to calculate their assets and liabilities by reference to their financial records.

Although these proposals address some of the deficiencies identified in the current rules, other deficiencies have not been addressed. These include the interaction with the capital maintenance rules in in Chapter 2J of the Act. The proposed changes do not change the taxation arrangements for dividends.

The Bill is the second tranche of reforms since 2010, designed to build on the additional powers shareholders have over the pay of company directors and executives.

As this is an exposure draft Bill, interested persons are able to make submissions on the proposed amendments. Submissions close on 15 March 2013 and can be made via the Treasury website.

DLA Piper can also provide a copy of the current Act, supplemented with the proposed changes set out in the Bill upon request.

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