SAIM5040 - Dividends and other company distributions: company law

Companies Acts requirements

The tax rules on dividends and other company distributions should be interpreted in the context of general company law. CTM20095 contains a summary of the Companies Acts requirements on dividends. The guidance there is aimed at the company’s obligations, but the discussion on when a dividend is paid, when it is due and payable, what constitutes payment, ultra vires and illegal dividends, and dividend waivers is relevant to the position of the recipient of the dividend. See CTM20090 for more on ultra vires dividends ( SAIM20000).

When is a dividend paid?

ICTA88/S834 (3) specifies that dividends are treated as paid for the purposes of the Corporation Tax Acts ‘on the date when they become due and payable’. This rule does not apply to dividends of an authorised unit trust, for which a separate rule is specified.

The date when a final dividend becomes due and payable is usually established by a resolution of the company. The dividend becomes due when the date on which it is expressed to be payable arrives. Only then is payment enforceable. In the case of a final dividend where a date for payment is not specified, an immediately enforceable debt is created so that the date of declaration of the dividend is the due and payable date.

An interim dividend can be varied and rescinded at any time before payment and can therefore only be regarded as ‘due and payable’ when the date for payment arrives.

The main case law authority for the above propositions is Potel v CIR (1970) (46TC658) which particularly indicates that the declaration of a dividend by a company and its payment are two separate matters.