Interpac Business and Migration Solutions Melbourne Australia

                                                                                                                                                                                                               (July 1, 2010)

MORE dividends and fewer companies ending their financial years on June 30 are two of the likely results of legislative changes about to come into effect.

Corporate law changes passed last week will change the way companies calculate whether to pay a dividend. They will also enable smaller companies that find it hard to get their accounts audited in the post-June 30 rush to move their balance date to a time that suits both their business and the availability of auditors.

Until now, a company can only make a payout to shareholders if it has made a profit, or still has retained earnings in its accounts from previous years. Companies now will be able to declare a dividend so long as they pass a solvency test - the board has to declare that the company's assets are greater than its liabilities and that paying the dividend will not affect its ability to pay creditors.

The push to change the rule came after the global financial crisis created billions of dollars in ''impairment'' charges - where directors decided the values of investments and assets were substantially less.

In many cases those charges were enough to wipe out current-year profits as well as all carry-over earnings - even though the charges were bookkeeping and did not cost the companies in cash terms. That left many businesses cash-rich, but unable to distribute the cash to shareholders because of the law governing dividends.

Foster's Group, for example, has deferred its final dividend for this year due to the effect of writing down the value of its vexed wine business. It still plans to pay investors roughly the same amount by declaring dividends out of trading profits as they are earned in this financial year.

This week Tatts Group said that, despite a $140 million write-down of its British poker machine business, it would still pay a dividend because its retained earnings at December 31 were about $271 million and, even after allowing for $128 million of that paid out in interim dividend, it will have sufficient funds from that and the second half to pay the $140 million final dividend.

The other benefit for Tatts and others that have made notional losses is that they have significant accumulated franking credits - so they will still be able to make payouts to investors that are effectively tax free.

Australian companies are estimated to have $100 billion of undistributed franking credits on their accounts so most would still be able to give their investors a dividend free of tax implications.

Many groups will still have to ask shareholders to vote at this year's annual meetings to approve changes to their company's constitutions before they can adopt the solvency test regime for dividend declarations.

While the change works well for some public companies, the Australian Institute of Company Directors has pointed out that it may make it more costly for some smaller groups to distribute profits.

That is because previous changes to reduce the ''red tape'' burden allowed many private companies to stop filing financial accounts on the public register. If they still want to pay dividends under the new regime, they will have to get a statement of solvency from their auditors to prove they have the capacity.

On the subject of shifting balance dates, it is not expected that too many companies will race to move away from June 30. Some, in fact, like being buried in the rush to report because it means less attention is paid to their performance.

Toy maker and distributor Funtastic recently announced it was changing its financial-year end to July 31. It said the timing was coincidental and that the change was to better align with its customers, most of which are retailers.

Major retail groups, such as Woolworths and Myer, close their accounts late to work around the fact their peak Christmas sales season finishes in early January.

(Source: theage.com.au)