Jurisdiction - Australia
Australia – At Last A Simpler Dividends Test… And Other Reforms.

17 April, 2014


Corporations Legislation Amendment (Deregulatory And Other Measures) Bill 2014

What You Need To Know


  • On 10 April 2014, the exposure draft of the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 was released for comment. 
  • The Bill proposes a pure solvency test for the payment of dividends and expressly exempts dividend payments from the capital maintenance provisions to the extent they are equal reductions in capital. 
  • The Bill also proposes abolishing the ability of 100 members to request that a company call a general meeting and modifying some of the items required in a listed company’s remuneration report. 
  • The deadline for submissions on the exposure draft is 16 May 2014.


A Single Solvency Test

Currently, section 254T prohibits a company paying a dividend unless the company has positive net assets immediately before the dividend is declared, the payment is fair and reasonable to the company’s shareholders as a whole and the payment does not materially prejudice the company’s ability to pay its creditors.

The objective of this test was stated to be to ensure that companies have the ability to distribute dividends if they can do so without causing detriment to ongoing operations.

The Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 proposes replacing the existing three limb test in section 254T with a pure solvency test. The proposed section 254T provides as follows:


(1) A company must not declare a dividend unless, immediately before the dividend is declared, the directors of the company reasonably believe that the company will, immediately after the dividend is declared, be solvent.
(2) A company must not pay a dividend unless, immediately before the dividend is paid, the directors of the company reasonably believe that the company will, immediately after the dividend is paid, be solvent.
(3) Subsection (2) does not apply to a dividend that is declared.

This is a much simpler test which is more likely to achieve the objective underlying the original section 254T. The proposed section 254T also removes some of the practical difficulties with the current section and will reduce the compliance costs with the current test in calculating a company’s assets and liabilities in accordance with accounting standards particularly for those companies that are not required to prepare audited financial statements.

In the case of a dividend designated as an “interim dividend”, it might be argued that directors should still be satisfied that the company’s full year accounts will disclose sufficient profit to source the dividend. To avoid any such issue, and where the company is not concerned to ensure that the dividend is sourced from profit, it may become appropriate for companies to cease calling a dividend “interim” and instead use the designation “half-yearly dividend” or similar.

Dividends As A Permitted Reduction Of Share Capital

The Bill also removes the substantial doubt that has existed since June 2010 as to whether the current section 254T permits an authorised reduction of capital without satisfying the requirements of Part 2J of the Corporations Act, particularly the requirement to obtain shareholder approval.

Proposed section 254TA expressly provides that a “company may reduce its share capital by declaring or paying a dividend, if: (a) the dividend is declared or paid, as the case may be, in accordance with section 254T; and (b) the reduction in share capital is an equal reduction”. (An equal reduction is one that, in effect, applies only to ordinary shares and on terms that are the same for each holder of ordinary shares (disregarding some minor differences).)

Directors will be required to include in the annual Directors’ Report details of the “source of any dividends paid otherwise than out of profits” and to explain the “board policy for determining the amount and source” when a dividend is paid out of sources other than profits during the year.

The explanatory statement accompanying the Bill states that the proposed changes are not designed to change existing taxation arrangements. If the above changes are made, companies will need to carefully consider the taxation implications of paying a dividend otherwise than out of profits (for example, tainting share capital accounts and the ability to frank dividends that are not paid out of profits). In addition, if a company makes use of section 254TA to effect a reduction in share capital by way of dividend, companies will need to consider the application of anti-avoidance provisions under which the Commissioner of Taxation may make a determination to treat the dividend as an assessable unfranked dividend (rather than a return of capital dealt with under the capital gains tax provisions) and cause a franking debit to be made to the company’s franking account.

Section 254TA is intended to expand the circumstances in which a company can pay a dividend. If implemented, the change may assist in facilitating corporate restructures – for example, demergers or spin-offs via in specie distributions of shares as a dividend without the need for shareholder approval.

Removing The Ability Of 100 Members To Request A Meeting

The Bill proposes removing the requirement for directors of a company to call and hold a general meeting on the request of at least 100 members (section 249D). If this change is made, only a member or members with at least 5% of the votes that may be cast at the general meeting could exercise this right.

The removal of the 100 member rule for meetings is a change that has been recommended at least since the end of last century (for example, in October 1999, the Parliamentary Joint Statutory Committee on Corporations and Securities recommended the 100 member test be removed). The change is one that we would expect to be supported by listed companies.

We note that no changes are proposed to the following:


  • the equivalent provision for managed investment schemes (section 252B); 
  • the ability of 100 members to give a company notice of a resolution that they propose to move at a general meeting (section 249N); or 
  • the ability of 100 members to require a company to distribute a statement in advance of a general meeting about a resolution that is proposed to be moved at the general meeting or any other matter that may be properly considered at the meeting (section 249O).

Remuneration Report Changes

The following changes to the content requirements for remuneration reports of listed companies are proposed by the Bill:


  • The report (or another part of the financial report or directors’ report) is to include a description of the company’s process for determining remuneration in relation to the company’s key management personnel (the remuneration governance framework). 
  • If options previously granted to a member of the company’s key management personnel lapse during the year, the number of those options and the year they were initially granted. In effect, this change will remove the current requirement to disclose the “value” of options that have lapsed during the year.
  • Section 300A(1)(e)(vi) – requiring disclosure of the percentage value of the person’s remuneration that consisted of options – will be removed.

The Bill will also remove the requirement for unlisted disclosing entities to prepare a remuneration report.


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For further information, please contact:


Sarah Dulhunty, Partner, Ashurst
[email protected]

Paul O’Donnell, Partner, Ashurst 
paul.o’[email protected]

Geoff Hone, Ashurst
[email protected]

Corey Lewis, Ashurst
[email protected]


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