Jurisdiction - Australia
Further Changes Proposed to the Test for Payment of Dividends.

15 December, 2011



The Parliamentary Secretary to the Treasurer yesterday released a discussion paper relating to, among other things, the test for payment of dividends in the Corporations Act 2001 (Cth) (“Discussion Paper”).


What do you need to do?


  • Review discussion paper, in particular the four options proposed for reform of the dividends payment test;
  • Identify any concerns, issues or ideas for reform; and
  • Participate in consultation, in particular which of the four options should be adopted.



The dividends test was amended in June 2010 by the Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth) (“Reform Act”) to replace the then “profits-based” test with a new “net assets” test.  The practical implications of these changes can be found here.


Further significant and important reforms flagged


The focus of the Discussion Paper is to propose new tests for the payment of dividends in Australia.  It highlights the many problems that Australian commentators, including Mallesons, identified with the amendments made by the Reform Act.  It then canvasses the options that the Government is considering in relation to the new requirements for the payment of dividends.


The release of the Discussion Paper is a welcome development in the Government’s undertaking to review and significantly refine Australia’s corporate reporting and regulatory framework.  This review and the consequential reforms have the potential to significantly improve, simplify and clarify an area of the law that has become, in many aspects, uncertain, inflexible and burdensome on companies.


Importantly, each of the four the options that the Government has raised as the basis for the dividends payment test is very different from each other option raised.  The options will, if adopted, have very different economic and financial consequences for dividend-paying entities, depending on their circumstances.  It will be very important, therefore, for such entities and their advisers – as well as creditors of such entities – to look very closely at each option and determine which one best delivers the right outcome for the various stakeholders.


Summary of key issues highlighted


The Government identifies a number of key issues introduced by the Reform Act that it hopes to address.

These issues include, among other things:


  • the unreasonable burden placed on some companies (in particular, companies that are not generally required to comply with accounting standards in the ordinary course) by the use of accounting-based calculations in determining whether assets exceed liabilities for the purpose of paying dividends;


  • the insufficient relationship that the new “net assets” test has with solvency;


  • the use of the word “declared” rather than “determined” in respect of the timing of the “net assets” test;


  • the inter-relationship between the “net assets” test and the capital maintenance requirements in theCorporations Act 2001 (Cth); and


  • the operation of the franking arrangements for dividends.


Summary of options regarding the payment of dividends


The Discussion Paper sets out the four key options that the Government is considering regarding the payment of dividends test.


These are:


  • the “do nothing” model – leaving the current rules intact.  This proposal would simply retain the changes made by the Government under the Reform Act introduced last year;


  • adopting a solvency test – providing for a company to be prohibited from paying a dividend unless the company’s assets exceed its liabilities after the dividend is declared (having regard to financial statements and records) and the company is able to pay, after payment of the dividend, all of its debts as and when they fall due;


  • reinstating a profits-based test – providing for a profits-based test to be reintroduced as the test for payment of dividends, either as a replacement for the current “net assets” test or in conjunction with that test; and


  • adopting a new hybrid test – providing for a company to be prohibited from paying a dividend unless the company’s assets exceed its liabilities immediately before the dividend is declared or paid, the payment of the dividend is fair and reasonable to the company’s shareholders as a whole and payment of the dividend does not materially prejudice its ability to pay creditors.


Importantly, the Discussion Paper does not raise any taxation issues or concerns regarding the options proposed for the payment of dividends test.  Whichever option is ultimately adopted by the Government in connection with the test, it is critical that the option is implemented in such a way as to not affect the underlying taxation of dividends in Australia.  To do otherwise would largely undermine the basis and foundation of the Reform Act, as well as give rise to further uncertainties.


Other issues highlighted by the Government


In addition to the issues identified in the Discussion Paper regarding the payment of dividends, the Government sees a need to amend the Reform Act to correct an inconsistency regarding the condition for changing the financial year of a company and to simplify the reporting requirements for parent entities.


Timing and consultation


It is unclear from the Discussion Paper when the Government’s intends to refine the new test for the payment of dividends in Australia as introduced by the Reform Act.


The Government has, however, announced that it will be conducting detailed consultation with interested stakeholders regarding the issues and options for reform highlighted in the paper. The Government has called for submissions on the Discussion Paper by 30 January 2012.


The Government has also indicated that the Australian Taxation Office intends to consider whether a draft Taxation Ruling should be prepared in relation to the uncertainty regarding the operation of franking arrangements.  The Australian Taxation Office has advised that consideration of whether a draft ruling should be issued will occur by the end of November 2011.


We are intending to make submissions to the Government as part of the consultation process. Please do not hesitate to contact us if there are any issues or concerns that you would like us to highlight as part of this process.



For further information, please contact:


Andrew Clements, Mallesons Stephen Jaques

[email protected]




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