Definition of a Dividend
A dividend is the distribution of the excess money obtained from a portion of the company’s earnings. Dividends are paid to one or more of the company’s shareholders. Dividends are managed and controlled by the company’s board of directors. However, the distribution of dividends needs approval from the shareholders through their ability to exercise their legal right to vote. Dividends are usually issued as cash payments, as shares of stock, or other forms of property; however, cash dividends are the most common. Apart from companies, exchange traded funds and mutual funds also cause dividends to be paid to shareholders.
A dividend can also be defined a token reward paid to the shareholders for their investment in a company’s equity which usually originates from the company’s net profits. While the larger portion of the profits is kept within the company as retained earnings which are intended to be money used for the company’s continuing and future business activities, the remainder can be allotted to the shareholders as a dividend. However, at times, companies may still make dividend payments even when they have not made sufficient profits. They may do so for the purpose of maintaining their established track record of making regular dividend payments.
The board of directors can choose to issue dividends over various time frames and with different pay-out rates. Different companies have different ways of issuing their dividend based on decisions made by the board of directors of the company. Dividends are usually paid at a scheduled frequency.
Dividend Payments and Singapore Companies
In Singapore, just as is the case anywhere else in the world, larger companies with more predictable profits tend to pay dividends on a more frequent basis. These companies are more likely to issue regular dividends as they seek to make the most of shareholder wealth in ways other than corporate growth. Companies in industry sectors which are strongest in a certain country generally tend to maintain a consistent record of payments of dividends. In Singapore, these sectors which drive the country’s economy include manufacturing, engineering, medical technology, healthcare, and financial services.
On the other hand, most start-up companies usually do not offer regular dividends because of the high costs that doing so would incur. Companies which are be in the early stages of development often need to expend significant sums of money on matters such as research and development, business expansion, and operational activities. This therefore results in insufficient funds to issue dividends to shareholders. Certain other companies also avoid making dividend payments because they are targeting greater growth and expansion in order to reinvest the profits in business instead of paying dividends.
However, the Singaporean government has provided a way for start-ups to solve this problem by offering them a tax exemption. This tax exemption reduces the financial constraints imposed on start-ups, which therefore may even allow them to pay dividends if the start-up happens to have any shareholders.
In any case, if your company is new and needs a sound financial plan, we at Paul Hype Page & Co can be of service. We will work with you to create a financial plan that will eventually lead to the sustained, long-term financial success of your company.
Dividends and Profits
Dividends are normally paid out of a company’s profits. Such profits are specifically the profits of the company and not the profits of any group or entity with which the company is associated. This also applies regardless of whether the total assets of the company are less than the original capital contributions made by the company’s shareholders. As long as the net income of the company is positive, the paid-up capital does not have to be maintained in order for dividends to be paid.
Capital appreciation is a portion of the profits of the company, even if no revenue profits have been earned by the company. For this reason, dividends may be paid out of capital gains derived from the sale of capital assets unless the company’s constitution forbids such dividend payments. On the other hand, a company’s profits do not include capital depreciation; however, they can include past-year profits that have been carried forward. Therefore, dividends do not have to be paid from profits earned in the same year. However, if such retained profits have become unavailable for distribution, they cannot be used for the purposes of paying dividends.
In Singapore, a company’s constitution sometimes places restrictions on what profits may be used for the payment of dividends; such holds true in most other countries as well.
Other Information Regarding Dividends
In addition to considering whether a company has enough profits to declare dividends, there are also other factors which ought to be considered. For example, shareholders do not have any unconditional rights to dividends unless otherwise specified in the constitution. Similarly, shareholders are usually not allowed to compel a company to pay dividends.
Profits are usually only required to be available on the date of declaration of dividends, not at the time the dividends are paid. Dividends may not be declared after the company has gone into liquidation because that would mean that the company in question would no longer be in operation.
Payment of Dividends
The first step of the process of dividend payment is usually made by the directors of a company. Generally, directors will recommend a particular rate to be paid as dividends. This rate is to be voted on and approved by shareholders during the company’s annual general meeting (AGM). Such dividends are referred to as final dividends. If the company has adopted the model constitution prescribed under the Companies Act without any modifications, the value of dividends declared is not permitted to exceed the amount recommended by the directors.
Directors are allowed to pay interim dividends if such are justified by the company’s profits. Such dividend payments are typically made before a company’s AGM and the release of its final financial statements. They usually accompany the company’s interim financial statements.
Once a final dividend has been validly declared, it becomes debt owed by the company to its shareholders. This debt is immediately payable unless the declaration stipulates that the dividend will be payable at a later date. Such a declaration cannot be cancelled, reduced or rescinded after the declaration has been made and agreed to by all parties involved. An interim dividend does not create a debt owed by the company to its shareholders, but a final dividend does. However, in most cases, companies are to honour their interim dividend declarations.
If a dividend is paid but the company in question does not have any profits available, directors who have permitted such a payment have committed an offense and will be punished in a suitable manner.
A director who has wilfully paid or permitted such a payment is guilty of a criminal offense under section 403(2) of Singapore’s Companies Act and is liable on conviction to a fine of up to S$5,000 or a jail term of one year. The director will also be liable to the company’s creditors for the amount of debts owed to them to the extent that the dividends paid exceeded the available profit.
To be convicted of this crime, it must first be established that the director had known of circumstances which would have proven that there had been insufficient profits to properly declare dividends. However, this only applies if the director knew of such a fact at the time that the dividends were declared.
Generally, there is no legal responsibility for shareholders who have received wrongful payments. However, shareholders who have received dividends while knowing that there were no profits from which the dividends could have been paid will usually be required to refund those dividends.
Amount of Money Received by Shareholders
Each shareholder usually receives dividends according to their shares. If a shareholder desires to change the amount to be received, the matter can be stated during the annual general meeting.
There are two primary causes for increases in a company’s dividend per share payout. The first is an increase in the company’s net profits out of which dividends are paid. The second is a change in the company’s growth strategy that leads the company to decide to expend less of its earnings for the purpose of growth and expansion, thus leaving a larger share of profits available to be paid to shareholders in the form of dividends.
There are a number of reasons why a company might decide to reinvest a smaller portion of its profits into growth and expansion projects. These reasons depend on the size of the company, production capabilities, and other similar factors. Investors typically prefer to invest in companies which have stable dividend payout ratios because such companies are financially sound company and have earnings which will support continued positive dividend yields for investors.
Ever since 2008, Singapore resident companies have been allowed to issue one-tier tax-exempt dividends. This means shareholders will not be taxed on this dividend income. However, dividends received from shares in co-operatives are taxable. Dividends are taxed in the year in which they are declared payable.
If you have any further queries regarding taxation of dividends or any other taxation matters, contact us at Paul Hype Page & Co. Our tax experts are well-versed in all aspects of Singapore taxation and will be willing to assist you with any issues you may have.
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