Debtors facing bankruptcy often ask questions about the amount of income they can earn as a bankrupt, and whether they can retain surplus income that might be accumulated during the period of their bankruptcy. The purpose of this newsletter is to explain the operation of the income contribution assessment regime and the manner in which a trustee is required to deal with any accumulated savings.
Pursuant to sub-section 139W(1) of the Bankruptcy Act 1966 (“the Act”), a trustee is required to make an assessment of the income of a bankrupt that is likely to be derived or which was derived during the bankruptcy period. In practice, at the commencement of the bankruptcy and then every year thereafter, a trustee will issue an income questionnaire to be completed by the bankrupt. Based on the information provided, a trustee will assess whether the bankrupt is liable to make contributions from their income. If the bankrupt is found to be liable, then the bankrupt will normally arrange to make regular installment payments.
A trustee can issue a fresh assessment pursuant to sub-sections 139W(2) and 139WA(1) of the Act if they are satisfied that the actual income derived by the bankrupt varies from the amount originally estimated. This may occur at any time during or after the end of a contribution period or even after the bankrupt is discharged.
2.1 What is Income?
Section 139L of the Act defines income very broadly, and includes;
(a)wages & salary.
(b)taxable fringe benefits.
(c)superannuation receipts, annuities and pensions.
(d)loans from associated entities.
(e)income earned overseas.
(f)business profits of a sole trader.
(g)super contributions in excess of 9.5%.
Importantly and pursuant to section 139M(1), income is taken as being derived by the bankrupt even though it isn’t actually received by the bankrupt. For example, income which is reinvested or income which is dealt with on behalf of the bankrupt or as the bankrupt directs.
2.2 How is the Assessment Calculated?
Section 139S of the Act provides that the amount of the contribution required to be paid by a bankrupt is 50% of the after tax income which exceeds the “actual income threshold amount”.
2.3 What is the Actual Income Threshold Amount?
The actual income threshold amount is the amount of income a bankrupt may earn upon which no contribution is payable. In accordance with section 139K of the Act, the threshold amount is determined by reference to the number of dependants for whom the bankrupt is responsible. The current amounts, which are updated twice yearly, are set out in the table below.
It is worth noting that if a bankrupt disagrees with the assessment of their income contributions, then pursuant to section 139Z, they are able to seek a review of the assessment by the Official Trustee.
2.4 What happens if a Bankrupt Earns Less than Expected?
In order to prevent a bankrupt from circumventing the income contribution provisions by earning less money than they would otherwise, a trustee may, pursuant to section 139Y of the Act, make a determination that the bankrupt receives or has received what is called “reasonable remuneration” and increase his or her income for assessment purposes accordingly. This prevents the bankrupt from channelling income into other entities or coming to an arrangement with their employer, especially if related, to reduce their reportable income.
2.5 What Happens in the Case of Hardship?
If a bankrupt considers that the requirement to pay contributions will cause hardship, then pursuant to sub-section 139T(1) of the Act, they may apply to their trustee for the assessment to be varied. Sub-section 139T(2) sets out the specific grounds upon which such an application can be made, such application to be in writing and to include evidence of the bankrupt’s income and expenses. The grounds for a hardship application are as follows;
(a)Ongoing medical expenses.
(b)Costs of child day care essential for work.
(c)Particularly high rent when there are no alternatives available.
(d)Substantial expenses of travelling to and from work.
(e)Loss of financial contribution.
2.6 What Happens if a Bankrupt does not Comply?
If a bankrupt does not provide relevant information to their trustee, then that failure constitutes grounds for an objection to automatic discharge pursuant to sub-section 149D(1)(e) of the Act. In addition, if a contribution amount is owed and remains outstanding prior to discharge, then a trustee may object to the discharge, pursuant to sub-section 149D(1)(f). Any such objection may extend the period of the bankruptcy by a further 5 years.
If the bankrupt does not provide particulars of their income, or if the bankrupt advises that they did not derive any income, then pursuant to section 139Z, a trustee may deem the income of a bankrupt on reasonable grounds and then prepare an assessment accordingly.
Trustees have a number of other powers available to them to compel the compliance of the bankrupt with their obligations in relation to contribution assessments. These include instructing the bankrupt pursuant to section 139ZIF to pay income into an account supervised by a trustee. A trustee is then required to supervise withdrawals from that account. Furthermore, if an amount remains due and payable after the date of automatic discharge, then a trustee may enforce the debt against the bankrupt in the ordinary coursein accordance with sub-sections 139ZG(3) and (4) including making the debtor bankrupt again.
3.0 ACCUMULATED SAVINGS
Sub-section 58(1)(b) of the Act states that property that is acquired by or devolves upon a bankrupt during the period of their bankruptcy vests in their trustee. Property of this nature is referred to as after-acquired property, one of the best examples being the receipt of an inheritance whilst bankrupt. Another such example might be accumulated savings. These monies would ordinarily be surplus income that may or may not have been assessed for contribution purposes. Until recently there was an assumption based on case law that accumulated savings derived from income do not vest in a trustee. However, a recent decision of the Full Bench of the Federal Court of Australia in the matter of Di Cioccio v Official Trustee in Bankruptcy (as Trustee of the Bankrupt Estate of Di Cioccio) FCAFC 30, has authoritatively examined the interaction between the income contribution regime and after-acquired property.
The facts of the case are relatively simple. An undischarged bankrupt used monies held in a bank account to acquire shares, such monies being derived from income earned within the period of the bankruptcy that did not exceed the actual income threshold amount. The bankrupt informed the Official Trustee of his intention to acquire a motor vehicle that was to be funded from the sale of the shares. The bankrupt was informed that the shares vested in the Official Trustee pursuant to sub-section 58(1). The bankrupt sought a review of the stance taken by the Official Trustee.
In essence, the Court found that the shares vested in the Official Trustee in accordance with subsection 58(1)(b). The Court went on to say that accumulated savings derived from income during the period of the bankruptcy would also constitute after-acquired property. In considering this, the Court was conscious of sub-section 134(1)(ma) which gives a trustee the power to “make such allowance out of an estate as they think just to the bankrupt, the spouse or de facto partner of the bankrupt or the family of the bankrupt”.
Interestingly, the Court also put the proposition that if the monies were being accumulated to acquire tools of trade for income earning purposes then the bankrupt may be able to retain those monies on the basis that such tools of trade, if acquired, constitute property pursuant to sub-section 116(2)(c), that is not available to creditors.
This case makes it abundantly clear that it is in the best interests of all bankrupts to be open and transparent with their trustee in relation to their income and to manage any contributions for which they are liable. In circumstances where a bankrupt saves their surplus income and does not pay regular instalments to their trustee, then a trustee may take possession of the accumulated savings and the bankrupt could remain liable to pay assessed contributions. This may become a situation where a trustee can exercise their discretion pursuant to sub-section 134(1)(ma) of the Act, taking into account the circumstances of the bankrupt.