Paying dividends from a Pty Ltd company: the compliance side
A dividend is a distribution by a company to its shareholders, usually out of profits, made according to the rights attached to each class of shares. For a Pty Ltd company, paying a dividend involves a directors’ resolution, a solvency check, the actual payment, and proper documentation. The tax treatment is a separate matter that should always be reviewed by a qualified tax adviser.
The starting legal point is section 254T of the Corporations Act, which sets out when a company can pay a dividend. Since 2010 the test has been a three-part: the company’s assets must exceed its liabilities immediately before the dividend is declared, and the excess must be sufficient to pay the dividend; the payment must be fair and reasonable to the shareholders as a whole, and the payment must not materially prejudice the company’s ability to pay its creditors. The directors must form the view that all three conditions are met before declaring the dividend.
The directors’ resolution should be in writing and should record the amount of the dividend per share, the share classes entitled to the dividend, the record date and payment date, the source of funds (typically retained earnings), and the directors’ confirmation that section 254T is satisfied. A short solvency declaration, signed by the directors, supports the resolution.
On the tax side, a dividend may be franked, passing franking credits to shareholders, if the company has franking credits available and chooses to frank it, subject to the benchmark rule. The mechanics are technical and depend on the company’s tax position, the shareholder’s tax position, and any specific arrangements within the company. We do not provide tax advice; the firm’s tax accountant is the right place to discuss franking and the implications of paying or deferring a dividend.
For record-keeping, the company should retain the directors’ resolution, the solvency declaration, dividend statements issued to each shareholder showing the unfranked and franked components, and any payment records. These documents should be kept for at least seven years and produced if the ATO or ASIC requests them.
Frequently asked questions
Can a company pay a dividend if it has no current year profit?
Possibly. Since 2010 the test in section 254T is not a profits test; it asks whether assets exceed liabilities immediately before the dividend is declared by enough to pay it, whether the payment is fair and reasonable to shareholders as a whole, and whether it materially prejudices creditors. Retained earnings from prior years commonly fund such a dividend, and the tax treatment should be checked separately.
Does a dividend need to be lodged with ASIC?
No. A dividend is not an ASIC lodgement event. What matters is the internal documentation: the directors resolution, the solvency declaration, and the dividend statements issued to shareholders showing the franked and unfranked components.
Do all shareholders have to receive the same dividend?
Within a class, yes: shares in the same class rank equally. Different classes can receive different dividends where the constitution defines those rights. This is one of the main reasons companies set up multiple share classes, and it only works if the constitution supports it.
This article is general information only and does not constitute legal, financial, or tax advice. While we endeavour to keep content accurate and current, laws and regulations change frequently. For advice specific to your circumstances, please consult a qualified professional adviser. CoSec Partners Pty Ltd accepts no liability for actions taken based on this content.