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Dividends are more than just a financial reward for investing in a company – they’re a key way to share your business’s success with those who believe in it. For Australian business owners and company directors, understanding how dividends paid to shareholders work isn’t just smart financial planning – it’s also crucial for legal compliance. If you’re a founder, investor, or small company director navigating growth, you may have questions such as: How are dividends paid on shares? What’s involved in paying out profits? What are the steps, the risks, and compliance obligations?
Whether you’re thinking about building wealth through shares or considering how to reward your business’s investors, getting the basics right can protect you from expensive mistakes. In this guide, we’ll cover what dividends are, how to get dividends from shares, when companies pay dividends, and the legal ins and outs you need to know as an Australian business owner. We’ll also walk you through your step-by-step compliance responsibilities so you’re set up for success.
What Are Dividends and Why Do Companies Pay Dividends?
Dividends are payments made by a company to its shareholders, usually as a distribution of profits. If you own shares in a company, receiving a dividend is essentially your share of the company’s earnings. But not every company pays dividends, and not every payout is straightforward.
Companies pay dividends for a number of reasons, including:
- Rewarding shareholders: It demonstrates that the company is performing well and values its investors.
- Attracting investment: Regular dividend payments can make shares more attractive, especially to income-seeking investors.
- Sharing profits: Dividends are a way for mature or stable companies to distribute excess profits rather than hoarding cash.
- Market perception: Paying dividends can signal confidence in ongoing profitability.
But keep in mind, not all companies pay dividends. Many fast-growing startups and tech companies prefer to reinvest their profits for expansion rather than pay them out as dividends. It all depends on the company’s growth strategy, legal structure, and financial health.
How Are Dividends Paid to Shareholders?
Dividends can be paid in several ways. The most common is a cash dividend, where funds are transferred directly to shareholders (often via bank transfer or cheque). Alternatively, companies may issue dividends in the form of shares (known as a bonus or stock dividend).
To pay dividends in Australia, companies need to follow a compliant process that involves:
- Board Resolution: The company’s directors must formally approve a dividend. This usually happens at a board meeting and is documented as a directors’ resolution.
- Dividend Notice: Shareholders are given notice, stating the amount and timing of the dividend.
- Payment: Dividends are paid according to the class and number of shares held by each shareholder – usually in proportion to their holding.
The timing and method of payment are often governed by the company’s company constitution or shareholders’ agreement. If your business is not a company (for example, if you operate as a sole trader or partnership), dividends aren’t applicable – you’d simply take profits as drawings or distributions based on your business structure.
When Do Companies Pay Dividends?
There’s no legal requirement that Australian companies must pay dividends each year. Instead, it’s up to the company’s board to decide based on profitability, future cash needs, and overall business goals. Most companies that pay regular dividends do so on a fixed schedule, such as:
- Interim Dividends: Paid out partway through the financial year, typically following a periodic profit review.
- Final Dividends: Declared at the end of a company’s financial year after final accounts are settled.
In practice, established, profitable companies – especially those listed on the ASX – will often pay dividends semi-annually or annually. Private companies often pay less frequently, or may only declare dividends in particularly profitable years.
It’s important to note: Never pay dividends if the company cannot afford it. Directors must ensure the company is solvent after the dividend is paid. Paying dividends when insolvent can trigger severe penalties for directors under Australian law.
How to Get Dividends from Shares
If you’re a business owner or investor keen to receive dividends, here’s how you can become eligible:
- Own Shares: Dividends are only paid to shareholders – so you need to hold shares in the relevant company on the record date (the cut-off set by the company).
- Eligible Class of Shares: Some companies have different classes of shares (e.g., ordinary and preference shares), and only certain classes may carry dividend rights. Check your shareholders agreement or company constitution for details.
- Be on the Register: Your name needs to appear on the registered list of shareholders at the time dividends are declared and paid.
From there, if the company declares a dividend, you’ll be paid automatically via the method set out in the company’s documents (bank transfer, cheque, or reinvestment options).
If you’re looking at listed companies, most large Australian organisations will provide clear guidance on their dividend policies via their investor relations pages. If you run a private business, these rules are set in your own company’s governance documents.
How to Pay Dividends: Step-by-Step for Australian Companies
If you’re a director or founder considering paying dividends to your shareholders, here are the key compliance steps to follow:
1. Check Financial Position
Directors have a duty under the Corporations Act 2001 (Cth) to ensure the company is solvent both before and after paying a dividend.
2. Director Approval and Board Resolution
The board must pass a resolution to pay a dividend, stating the amount, payment date, and which shareholders qualify. This should be documented and minuted clearly.
3. Review Corporate Documents
Refer to your company constitution and any shareholders agreement to ensure you follow any dividend rules specific to your business. These documents may set out how often, how much, and under what circumstances dividends can be paid.
4. Prepare Dividend Statements
Under Australian law, each shareholder must receive a statement specifying the amount of the dividend, franking credits (if any), and other relevant details for tax purposes.
5. Make the Payment
Funds are then disbursed via the agreed payment method by the date specified in the board resolution.
6. File Records and Assist With Tax Reporting
Keep accurate records of all dividends paid, resolutions, and statements issued. Shareholders will need these for their personal tax returns.
If this process seems complex, working with a corporate lawyer or company secretary can help ensure everything is compliant and properly documented.
Dividend Compliance: The Legal Obligations You Must Follow
Paying dividends isn’t just a financial decision – it’s a legal one. As a company director in Australia, you need to ensure:
- The Company Is Profitable: You can only pay dividends out of company profits. Don’t use loan funding or capital.
- The Company Remains Solvent: The company must stay able to pay all its debts after the dividend is paid. Otherwise, you risk breaching insolvent trading laws.
- Fairness and Proportionality: Dividends must generally be paid equally to shareholders of the same class of shares, unless your company documents say otherwise.
- Document Everything: Board resolutions, payment records, and dividend statements must be retained for compliance and possible audits.
- Tax and Franking Compliance: If paying franked dividends (which pass on a tax credit to shareholders), you need to comply with franking account rules under the ATO.
- ASIC and Statutory Obligations: Public companies may need to notify ASIC of certain dividend-related actions, especially if the payment is significant or unusual.
For companies with international shareholders or parent entities, additional considerations like withholding tax may also apply.
What Stocks Pay Dividends? Understanding Australian Practice
Not every share pays dividends. If you’re an investor chasing dividend income, you’ll want to look for:
- Large, Established Companies: Banks, mining giants, and utilities often have steady profit and regular dividend policies.
- Blue Chip and ASX-Listed Stocks: Many blue-chip stocks are known for paying consistent dividends in Australia.
- Dividend-Focused Funds: Some ETFs and managed funds are designed to generate income by holding dividend-paying shares.
It’s important to do your research. Companies may suspend or cut dividends in bad years, and not all good investments pay dividends – some focus on capital growth.
Dividends for Small and Growing Businesses: Is It Right For You?
While paying dividends can boost investor confidence and provide shareholder value, if you’re a newly established or rapidly growing business, you might prefer to reinvest profits into scaling up. Deciding whether to pay a dividend is a strategic choice – one that should balance your business’s need for cash flow, growth ambitions, and shareholder expectations.
If you have multiple founders or outside investors, ensure everyone agrees on the dividend policy and that it’s reflected in your shareholders agreement. A clear, compliant dividend process helps avoid disputes and keeps your business focused on its goals.
What Legal Documents Will I Need When Paying Dividends?
Setting up and paying dividends properly requires strong documentation and agreements from the outset. The main documents you’ll need include:
- Company Constitution: Sets out the rules for managing the company, including how and when dividends can be declared and paid. Learn more here.
- Shareholders Agreement: Outlines the rights and obligations of all shareholders, including dividend rights and preferences. Read details.
- Board Resolutions: Decisions to declare a dividend must be properly documented at the board level.
- Dividend Statements: Each payment to shareholders must be accompanied by a statement for their records and tax.
- ASIC and Tax Records: Keep all necessary records, and ensure all statutory filings are completed, especially for public companies.
Not every company will need all of these, but most will need at least a constitution and a resolution for every dividend payment. If you’re in doubt about which documents are mandatory or what to include, it’s wise to get early legal advice.
What Are the Risks of Paying Dividends Incorrectly?
Paying dividends when your company is not profitable, or without proper approval, can result in:
- Director Liability: Penalties for insolvent trading or breaching director duties.
- Shareholder Disputes: Disagreements if dividend policy is unclear or not followed.
- Regulatory Action: Fines or intervention from ASIC if compliance is not met.
- Tax Trouble: Incorrect franking or failure to issue proper dividend statements can lead to tax penalties for both the company and shareholders.
Taking shortcuts with dividend compliance isn’t worth the risk. Proper documentation and legal review are essential.
Alternatives to Paying Dividends
If dividends aren’t the right fit for your business model right now, consider alternatives for rewarding shareholders or funding growth, such as:
- Share Buybacks: The company buys back its own shares from shareholders, providing a capital return.
- Capital Growth: Focus on increasing the company’s value, so shareholders benefit through higher share prices (especially for investors planning to sell).
- Bonus Issues: Issue additional shares instead of paying cash dividends.
- Reinvestment Schemes: Offer shareholders the option to reinvest dividends back into the company, rather than take cash.
Each of these options has legal and tax implications, so be sure to seek advice before implementing an alternative strategy.
How To Stay Compliant With Dividends Paid to Shareholders?
Here are some best practices for ensuring your dividend payments are always compliant:
- Have the Right Documents: Ensure you have a clear, up-to-date company constitution and shareholders agreement. If you don’t have these, get expert help to create or review them.
- Follow the Rules: Only pay dividends from profits and after director approval. Keep detailed records.
- Maintain Solvency: Always check (and document) that the company will remain solvent after any dividend.
- Issue Dividend Statements: Send required information to every shareholder with each payment – for compliance and their tax returns.
- Coordinate With Accountants: Dividends have tax consequences; make sure your accounting and tax team are in the loop.
- Seek Legal Guidance: Keep your business secure with tailored legal advice – especially as your company grows or brings on new investors.
You can also review Sprintlaw’s resources for protecting your information and corporate governance to set the right foundations from day one.
Key Takeaways
- Dividends paid to shareholders must follow strict process and compliance requirements under Australian law.
- Directors must ensure the company is solvent after paying any dividend, and the process must be properly documented and approved.
- Having the right legal documents – like a company constitution and shareholders agreement – protects you and clarifies everyone’s rights.
- Tax and record-keeping compliance is critical with dividends; issuing proper statements is non-negotiable.
- Paying dividends is a strategic choice – your business may prefer to reinvest in growth, and that’s fine too.
- Legal advice early can prevent costly mistakes and disputes about dividends, especially as your business grows or takes on investors.
If you’d like a consultation on dividends, shareholder legal compliance, or setting up the right documents for your company, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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