Reserves, Provisions and Dividends Chapter 5 Reserves, Provisions and Dividends

5.1 Income Tax

PAYG Instalments The PAYG Installment System applies to taxpayers with business and investment income.

PAYG Instalments Most taxpayers with business or investment income will pay tax instalments quarterly.

28 February (one month extension) PAYG Instalments Quarterly payments will be due 28 days after the end of each quarter: 28 October 28 February (one month extension) 28 April 28 July

AASB 112 ‘ Income Taxes’ Annual company income tax = taxable income * company tax rate. Income tax expense is charged against profits for the year. The balance payable in respect of the current period’s taxable income is a liability called Current Tax Payable.

Income Tax Under the PAYG Instalment system: The first three quarterly income tax payments are based on sales or income whereas the final payment is an adjustment.

Income Tax

5.2 Reserves

Reserves Reserves are that part of Shareholder’s Equity that are not issued or paid-up capital or retained profits. Chapter 5

Sources of Reserves Transfer of profits into a reserve for a specific reason or future need. Asset revaluation gains can be directly posted to the reserve. Chapter 5

Common Types of Reserves Dividend Equalisation Reserve Asset Revaluation Reserve Capital Profits Reserve Currency Fluctuations Reserve General Reserve

Categories of Reserves 1. Realised Gains 2. Unrealised Gains 3. Shareholder Contributions

5.3 Provisions

AASB 137 Provisions, Contingent Liabilities and Contingent Assets Represent a present obligation resulting from a past event Require a probable outflow of resources to settle the obligation Must be able to be reliably estimated.

AASB 137 Provisions, Contingent Liabilities and Contingent Assets A probable obligation exists where it is considered more likely than not. If it is a remote possibility only, then it does not need to be disclosed.

Types of Provisions Provision for Annual Leave Provision for Sick Leave Provision for Long Service Leave Provision for Dividend Provision for Warranty

Provisions vs Reserves Provisions are liabilities. They are estimates of amounts to be paid in the future. Reserves Reserves are an increase in Shareholders Equity arising from profits to meet future needs.

Provisions vs Liabilities Provisions are estimates of future obligations. Liabilities Liabilities that represent a present obligation of the company arising from past events.

5.4 Accounting Entries

General Reserve Created to transfer amounts from retained profits. No specific purpose for the funds. Can be used to shore up the Balance Sheet of a company.

General Reserve Companies can use this reserve at their discretion. There is no requirement to have a general reserve.

General Reserve – Accounting Entries

Dividend Equalisation Reserve Established to set aside amounts for the payment of future dividends. Can be used to pay usual dividends during a period of low profits.

Dividend Equalisation Reserve It is not a requirement that a company establishes this reserve. Can convince shareholders that the company is focused on providing dividends.

Dividend Equalisation Reserve – Accounting Entries

Asset Revaluation Reserve Companies periodically assess and revalue assets such as Land and Buildings. This is done to accurately reflect the true value of assets.

Asset Revaluation Reserve Any gain from revaluing assets is not treated as profit. The gain is transferred to the Asset Revaluation Reserve.

Asset Revaluation Reserve – Accounting Entries

Funding a Bonus Share Issue with an Asset Revaluation Reserve The Asset Revaluation Reserve may only be used to fund bonus share issues.

Funding a Bonus Share Issue with an Asset Revaluation Reserve

Reasons for a Bonus Issue Bonus Issues Reasons for a Bonus Issue A non-cash return to shareholders To tell the market that the company expects good future profitability. To use funds in the Asset Revaluation Reserve or other reserves which cannot be used elsewhere. As a takeover defence.

Bonus Issues – Accounting Entries

Example: Bonus Share Issue

5.5 Dividends

Dividends Interest is not payable on a dividend. Dividends are a distribution to shareholders out of retained profits. The company’s constitution will set out dividend policy or the Replaceable Rules may be adopted. Interest is not payable on a dividend.

Interim and Final Dividends The company constitution will usually allow the payment of an interim and final dividend. An interim dividend is a dividend paid at some time throughout the accounting period.

Steps in Dividend Payment The Declaration Date The Closure of the Register and Date of Record Ex-Dividend Date Date of Payment

1. The Declaration Date The Board of Directors resolves to pay an interim dividend during the year on a declared date.

2. The Closure of the Register and Date of Record Notifications of share transfers before the date of record will mean that any new shareholder receives the dividend. However, notification on or after will mean that the previous shareholder receives the dividend.

3. Ex-Dividend Date The ex-dividend date is 4 days before the date of record. A purchaser of shares before the ex-dividend date is entitled to the dividend.

4. Date of Payment Is the date on which the dividend cheques are mailed to shareholders or credited to shareholders.

Dividends – Accounting Entries

Example: Payment of Dividends

Example Continued

Self-Test Exercise

Self-Test Exercise