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A fistful of dividends

Published on 01 Apr 11 by "TAXATION IN AUSTRALIA" JOURNAL ARTICLE

Section 254T of the Corporations Act 2001 formerly provided that a dividend could only be paid out of profits of the company. That "profits test" has recently been replaced by a three-fold test for the payment of a dividend which looks at net assets of the company, fairness to the shareholders, and the company's ability to pay its creditors.
This article examines the implications of this change, in light of company law notions of what a dividend is, and the somewhat broader definition of dividend for income tax purposes. It is argued that the new law is limited in scope, in that it does not deal with what constitutes a dividend under company law, and that the new test for the payment of a dividend may substantially weaken the fundamental principle regarding the maintenance of capital in the company. Questions also remain about creditors' concerns, whether dividends can be paid out of capital, potential tax concerns, and whether definitions for tax and corporations law purposes should be aligned.

Author profile:

John Cavanough
John is Barrister and Solicitor - The Supreme Court of Victoria.
Current at 1 October 2014
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