A dividend resolution is the formal company record that supports a decision to distribute value to shareholders. For many Australian business owners, it is prepared around year-end, often when reviewing profits, cash flow and tax planning. However, a dividend is not simply a bookkeeping entry or a way to move money from a company account to a director’s personal account.

A properly considered and documented resolution matters because it helps show that the company had authority to make the distribution, that directors considered the company’s financial position, and that the tax and franking treatment has been handled consistently. Getting the timing or wording wrong can create avoidable issues for the company and its shareholders.

What a dividend resolution does, and when it is relevant

A dividend is a distribution made by a company to its shareholders. It may be paid in cash, but company law also contemplates other methods, including issuing shares, granting options or transferring assets. In practice, closely held companies most commonly use cash payments, credits to shareholder loan accounts or properly documented set-offs.

A dividend resolution is the directors’ written decision to make, or determine the terms of, that distribution. It should sit alongside the company’s financial records, share register, accounting entries and shareholder distribution statements.

This is relevant only where the business is conducted through a company. A sole trader cannot pay themselves a dividend because there is no separate company and shareholder relationship. Likewise, a trust distribution is not the same thing as a company dividend, even where a trust owns shares in a company or a company is a beneficiary of a trust.

It is also important to separate the company from its owners. Cash held in the company’s bank account belongs to the company, not automatically to its directors or shareholders. A dividend is one legal and tax-recognised way of distributing company value, but it needs to be supported by the right corporate decision-making.

The legal checks directors should make before resolving to pay a dividend

Before approving a dividend, directors should start with the company’s constitution. Many proprietary companies rely on the replaceable rules in the Corporations Act, under which directors may determine that a dividend is payable and fix its amount, payment time and payment method. A company’s constitution, or the terms attaching to particular shares, may change that position.

The company must also satisfy the statutory dividend test. Immediately before the dividend is declared, its assets must exceed its liabilities by an amount sufficient to cover the dividend. The payment must be fair and reasonable to shareholders as a whole, and it must not materially prejudice the company’s ability to pay creditors. Assets and liabilities are to be calculated under the applicable accounting standards.

This means a profitable year does not automatically make a dividend appropriate. Directors should look beyond the profit and loss report and consider matters such as:

  • available cash and expected cash receipts;

  • unpaid tax, GST, superannuation and supplier liabilities;

  • loan repayments and finance covenants;

  • future payroll and operating costs;

  • pending legal claims, warranty obligations or other contingencies;

  • whether the company may need funds for stock, equipment or business growth; and

  • the financial position of the company itself, rather than a broader business group.

The creditor protection element is especially important. A dividend should not leave the company unable to meet debts as they fall due. ASIC guidance also emphasises that directors need to assess solvency where a company is experiencing financial difficulty.

Directors should also be careful with the word “declare”. Under the replaceable rule, a company generally does not incur a debt merely because directors fix a dividend amount or payment time. The debt ordinarily arises when the fixed payment time arrives. But where a company’s constitution provides for the declaration of dividends, the debt may arise when the dividend is declared. That difference can be significant, particularly where payment is intended to occur later or the company’s cash flow is tight.

What a well-prepared dividend resolution should record

There is no single statutory template called a “dividend resolution”. The right wording depends on the company’s constitution, share classes, financial position and intended tax treatment. Still, a clear resolution should leave little doubt about what the directors decided and why.

In most cases, the record should cover the following points:

  • the company’s full legal name and identifying details;

  • the date of the directors’ meeting or written resolution;

  • the directors participating and their authority to make the decision;

  • confirmation that the constitution and share rights have been considered;

  • the shareholders and classes of shares entitled to receive the dividend;

  • the total dividend, or the amount payable per share;

  • the source or financial basis supporting the distribution, such as retained earnings or other available reserves;

  • the date on which the dividend is payable;

  • the payment method, including whether it will be paid in cash, credited, set off or otherwise satisfied;

  • whether the dividend is intended to be fully franked, partly franked or unfranked;

  • the directors’ consideration of the company’s assets, liabilities, creditor position and cash flow; and

  • authority for the accounting entries, payment steps and issue of shareholder distribution statements.

The resolution should match the facts. For example, if a dividend will be paid on a future date, it should say so. If a dividend is being credited to an amount genuinely owed to a shareholder, the company should be able to identify that liability and keep records supporting the set-off.

Avoid vague descriptions such as “funds to be drawn as required” or “dividend to be determined later”. Those phrases may not establish who is entitled to what amount, when the entitlement arises or how the company intended to satisfy it.

A company must keep minutes of directors’ meetings and directors’ written resolutions in its minute books. The records must be made within the legislated timeframe, and signed minutes or resolutions are evidence of the proceeding or decision unless proven otherwise. A sole director of a proprietary company can pass a resolution by recording and signing it.

Franking credits: the tax element that needs separate attention

A dividend resolution and a franking decision are closely connected, but they are not exactly the same thing. Franking credits broadly recognise Australian income tax paid at the company level and may allow eligible shareholders to receive a tax offset for that tax.

For a distribution to be franked, the company must be a franking entity that meets the residency requirement, the distribution must be frankable, and the company must allocate a franking credit to it. The legislation does not require that allocation to be made in one particular way, although recording it clearly in the dividend resolution is generally sensible governance.

A company should not assume that a positive retained earnings figure means it can fully frank a dividend. The available franking account balance, the maximum permitted franking credit and the nature of the distribution all matter. A franked distribution creates a debit in the company’s franking account when the distribution is made.

The benchmark rule is another important consideration. Broadly, it requires frankable distributions made within the relevant period to be franked to the same extent, subject to limited exceptions. The rule is intended to prevent one shareholder being preferred over another through the way dividends are franked.

A shareholder receiving a franked dividend will generally include both the cash dividend and the franking credit in assessable income, while receiving a tax offset equal to the franking credit. However, the outcome is subject to conditions and integrity rules, including rules that can apply where shares are not held with sufficient economic exposure or where the imputation system has been manipulated.

The company must provide a distribution statement for a frankable distribution. The statement must identify the company, state the distribution date and amount, specify the franking credit and franking percentage, and disclose any withholding tax deducted. Private companies may have a later timeframe in some circumstances, but they should not treat this as a reason to delay their records or leave shareholders uncertain about the tax treatment.

Timing, unpaid dividends and shareholder loan accounts

Timing is often where dividend resolutions become complicated. A resolution prepared after the event, or backdated to fit a preferred tax outcome, can be difficult to support if it does not reflect what actually happened at the relevant time.

The company law consequences also depend on the constitution and the resolution wording. As noted above, a dividend may become a debt on declaration under some constitutions, while in other cases the debt arises only when the specified payment time arrives. Directors should understand this before resolving to pay a dividend that the company does not intend to pay immediately.

An unpaid dividend is not automatically a problem, but it should not become an unexplained balance in the accounts. The company should be able to show:

  • when the shareholder became entitled to the amount;

  • whether the amount has been paid, credited or set off;

  • whether the shareholder has agreed to a set-off or other arrangement where that is relevant;

  • how the amount appears in the company’s financial records; and

  • whether the arrangement affects the company’s ability to pay creditors.

Shareholder loan accounts need particular care. Division 7A is an integrity measure that can treat certain payments, loans and forgiven debts by a private company to a shareholder or an associate as unfranked dividends for tax purposes. A dividend resolution does not retrospectively fix a private use of company funds or an overdrawn loan account.

This is why an EOFY review should consider dividends and shareholder loans together, but document them separately. A genuine dividend, a loan, salary, director fee, reimbursement and private expense are different transactions with different legal, tax and record-keeping consequences.

A practical example of how the process can work

Consider a small trading company with two ordinary shareholders. The directors review the year-end management accounts and updated balance sheet, then prepare a cash flow forecast that includes upcoming supplier payments, payroll, tax obligations and finance commitments.

After that review, the directors conclude that the company can make a distribution without affecting its ability to pay creditors. They check the constitution and share register, determine the amount payable on the ordinary shares, review the franking account and confirm the intended franking treatment.

The directors then sign a written resolution recording the dividend amount, shareholder entitlements, payment date, payment method and franking decision. The bookkeeper records the dividend payable, the company issues compliant distribution statements and the payments are made in line with the resolution.

The value of this process is not paperwork for its own sake. It creates a consistent trail between the directors’ decision, the company’s financial capacity, the accounting records and the shareholders’ tax reporting.

Key takeaway

A dividend resolution is an important governance and tax record, not a last-minute formality. It should be based on the company’s constitution, share rights, current financial position, ability to pay creditors, franking account and the actual way the dividend will be paid or credited.

Careful preparation can help prevent mismatches between company minutes, accounting entries, shareholder loan accounts and tax returns. If your business is considering dividends, reviewing franking credits or cleaning up shareholder loan accounts, can help you work through the steps in a way that reflects your company’s circumstances.

This article is general information only and is not personal financial or tax advice. Before acting, speak with a registered tax agent or accountant, such as, about your specific circumstances.