Sustainable capital management is a key focus area for boards because companies must balance internal capital needs with returning profits to shareholders. A company's capital management strategy will change over time in response to the business lifecycle, economic environment and shareholder appetite, with dividends forming a critical component of this strategy.
In Australia, dividend payments have grown substantially in the past few years even though earnings growth has been modest. This means finance teams are under significant pressure to ensure directors have confidence in any plans to pay dividends. Paying a dividend is not easy. As a starting point, companies need to ensure that any dividend they pay is legal; that is, it complies with the Corporations Act 2001 (Cth) (the Corporations Act). While the Corporations Act's dividend requirements may seem straightforward, in practice they're not. Given the accounting is critical in assessing whether a dividend payment is legal, directors will look to accounting and finance teams to support them.
When determining whether a dividend can be paid to shareholders, you need to consider a number of factors. Both the Corporations Act and tax law place restrictions on the ability of companies to pay dividends. Critically, the existence of consolidated group profits, alone, is not necessarily enough for you to assess your capacity to pay dividends to your shareholders.
Our tool is designed to provide an early warning of potential complications and help you build an action plan so that your directors can make an appropriate assessment of your company's ability to pay a dividend.
The purpose of this tool is to highlight potential issues that might prevent your company from paying a dividend and to provide general information. This tool does not necessarily take into account all of the specific circumstances relevant to any dividend capacity assessment and does not constitute tax and/or legal advice. You should not take, or refrain from taking, action based on its content. If you have any questions, please speak to your PwC contact.