Transcript CHAPTER 19 DIVIDENDS At the end of this topic you should know: • the procedure and requirements for payment of dividends; and • the rights.

CHAPTER 19
DIVIDENDS
At the end of this topic you should know:
• the procedure and requirements for payment of dividends;
and
• the rights of shareholders regarding dividends.
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Introduction
A dividend is a share of the company’s profits paid to a
shareholder.
Subject to a small number of fundamental rules in Pt 2H.5 of
the Corporations Act, the rules governing the procedure for
the payment of dividends can be found in a company’s
internal rules.
Companies have the power to distribute profits as dividends
to shareholders: s 124.
Provided that a company’s operations have been profitable
and the directors have recommended that dividends be paid,
most public companies pay dividends each half-year.
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Calculation of Dividend –
Who Decides Whether to Pay a Dividend?
Companies pay dividends to their shareholders in
one of the following forms:
• a dividend expressed as a percentage of the issue
price of a share; or
• a dividend expressed as a fixed amount (number
of cents) per share.
The directors normally have the power to decide if,
when and how to pay dividends: s 254U, replaceable
rule.
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Who Decides Whether to Pay a Dividend?
Shareholders are not entitled to a dividend as of right
unless this is specifically stated in the company’s
internal rules: Burland v Earle [1902].
Shareholders cannot force companies to pay
dividends, as dividend policy is generally regarded as
a matter for the board, but they may argue
oppression (Pt 2F.1), and fraud on the minority:
Miles v Sydney Meat Preserving Co Ltd (1912).
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Differing Dividend Rights –
When Can a Dividend be Paid?
A company’s constitution may provide for the share
capital to be divided into classes of shares, each
class of which may have different dividend rights, or
different dividend rights attaching to shares within the
same class of shares: s 254W.
A dividend may be paid if the three limb tests have
been met, namely:
• the balance sheet test;
• the protection of shareholders; and
• the solvency requirement; s 254T, and see
[19.100]-[19.120].
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When Does a Dividend Become a Debt?
Subject to one exception, a company is not liable to
pay a dividend unless and until the time for payment
of the dividend arrives: s 254V(1) and (2).
If a company adopts the traditional method of
declaring final dividends, the company incurs the debt
when the dividend is declared, rather than when it is
paid.
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Liability of Directors and Auditors
Any dividend payment contrary to s 254T may result
in directors becoming liable for insolvent trading and
being ordered to compensate the company if they
authorise the payment of dividends which render the
company insolvent: s 588G.
Where dividends have been paid and this has led to
the company becoming insolvent due to the auditors’
negligence, the auditors will generally be liable to the
company.
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Dividend Imputation System
Shareholders who receive franked dividends can
calculate their tax liability with the following steps:
Step 1: The amount of the dividend received and the
imputed credit are added together;
Step 2: The total is added to all other taxable income;
Step 3: The tax payable, including the Medicare levy,
is calculated; and
Step 4: The tax credit is deducted from the tax
payable.
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Dividend Imputation Example
$
Dividend received
700
Imputed credit (fully franked)
300
Income from other sources
20,000
Total assessable income
21,000
Tax payable
3,477
Less franking credit
300
Tax payable after dividend imputation
3,177
2013 Thomson Legal & Regulatory Ltd. All Rights Reserved.
PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.