Corrs In Brief: New dividend rules

New dividend rules came into effect from Monday 28 June 2010. The rules replace the requirement to pay dividends from profits with a three-pronged test based on net assets, fairness and solvency.

Key take aways:

• The profits test for paying dividends has been replaced with a “solvency” test.
• From 28 June 2010, dividends do not have to be paid out of profits.
• You will need to review your company’s constitution to ensure that the provisions in the constitution line up with the new rules.
• The implications of the new rules are unfortunately not straightforward.

Key issues relating to the implications of the new rules are:

• Whether dividends have to be declared instead of just determined; and
• Clarifying when the test applies and how, practically, a company can ensure that it has met the test from an accounting perspective.