Income Contributions in Bankruptcy
Can a bankrupt work during their bankruptcy?
Yes. In most cases, a bankrupt will be able to earn an income during their bankruptcy. Subject to some provisions and exceptions, the bankrupt is encouraged to earn an income during this period. There is no logical reason why a bankrupt should not be entitled to earn an income and benefit from those earnings. The Bankruptcy Act says that they should also pay contributions to their estate.
What are income contributions?
A working bankrupt may be liable to make a contribution to their bankrupt estate from income earned during their bankruptcy. It is equitable that some of the rewards from the bankrupt's efforts during the bankruptcy period be used to satisfy their past debts and this has been put into statute in the Bankruptcy Act.
What income is assessed for contributions?
The bankrupt’s income is assess to determine whether contributions must be paid. The provisions of the Bankruptcy Act set out the definition of income.
Income has the usual meaning as defined under the Taxation Acts, but also includes other amounts that have not been earned from physical exertion or investments, and amounts that may not even be taxable income. These other incomes include loans made to the bankrupt, items that fall under the Fringe Benefit Tax provisions, annuities, pensions and some Social Security or insurance payments.
Is all money earned income?
No. There are a number of amounts that are not income for contribution assessment purposes. These are set out under paragraph (b) of section 139L.
(b) the following are not income in relation to a bankrupt (even if they come within the ordinary meaning of "income"):
(i) an amount paid to the bankrupt:
(A) from the Child Support Reserve established under the Child Support (Registration and Collection) Act 1988 ; or
(B) from another source for the maintenance of children of whom the bankrupt has custody; or
(iv) a payment to the bankrupt under:
(A) a legal aid scheme or service established under a law of the Commonwealth or of a State or Territory of the Commonwealth; or
(B) a legal aid scheme or service approved by the Attorney-General for the purposes of paragraph 2(4)(a) of the Federal Court of Australia Regulations; or
(C) any other legal aid scheme or service established to provide assistance to people on low incomes;
(v) a payment or amount that the regulations provide is not income of the bankrupt.
Are any amounts deductible from after-tax income?
Yes. Deductions are available for payments to support a child if paid pursuant to a maintenance agreement under the Family Law Act or under a maintenance order. Deductions are also available for certain business expenses. Section 139N of the Bankruptcy Act sets out these deductions in detail.
How does the trustee obtain information on a bankrupt's income?
The bankrupt must provide details of their income to their trustees. The trustee will usually send a form to be completed by the bankrupt on each anniversary of the date of bankruptcy. These forms need to be completed and returned with any documentation supporting the income earned and deductions claimed.
What if the bankrupt does not complete the forms?
It is an offence for the bankrupt not to cooperate with their trustee and complete the assessment forms. If they do not do so, the trustee may object to the bankrupt's discharge from bankruptcy and make an estimate of the bankrupt's income and assess them on that amount.
Can the trustee investigate the bankrupt's income information?
Yes. Whilst the trustee has the power to make an assessment on what they reasonably believe to be the income of the bankrupt, practically they will investigate the matter as fully as possible before making that assessment. If the information received from the bankrupt is inadequate or unbelievable, the trustee will seek further information.
If appropriate, the trustee can conduct their own examination and can require further information to be provide to clarify any matter.
If the further information is not forthcoming, the trustee can make the assessment on what they reasonably believe the income is and let the bankrupt disprove the assessment. The trustee may also object to the discharge of the bankrupt for not supplying this further information.
How is the income contribution calculated?
The calculation is made on Assessed Income, which is the surplus of income after tax, Medicare and proper deductions. A contribution will be payable if that Assessed Income is more than the statutory threshold. The amount of that threshold is based on the number of dependents that the bankrupt had during that assessment period.
The trustee is entitled to receive one-half of the amount over the threshold. That is, the 'over threshold after tax income' is divided equally between the bankrupt and his trustee. The formula is:
(Assessed Income - Actual Income Threshold Amount) / 2
How is the assessment made?
The trustee makes an assessment based on the information supplied by the bankrupt. Estimates of future income are made at the beginning of the assessment year. An assessment (called a determination) is made on these estimates and the bankrupt becomes liable to pay any contributions to the trustee from the date of the assessment.
At the end of the assessment period, the bankrupt will supply actual amount of the past year's income, along with estimates for the next year. The first year's assessment for the past year is adjusted if necessary, a new assessment is made for the second year and the process starts again.
How often are the assessments made?
Each assessment period runs from the date of the bankruptcy or its anniversary and ends on the day before the next anniversary. Assessment periods continue until the bankrupt is discharged, even if the bankruptcy is extended through an objection.
What happens to the money paid under an assessment?
The money paid under these provisions will be paid into the general pool of funds that is available to creditors.
What obligations does the bankrupt have?
The bankrupt must provide information about their income and deductions and provide access to all books and records required by the trustee. If the bankrupt neglects or refuses to provide either the income information or the required records, the trustee can lodge an objection to the discharge of the bankrupt and ITSA may prosecute the bankrupt for an offense.
How does the bankrupt get notice of the assessment?
Once a determination has been made, the trustee sends a notice to the bankrupt setting out the amount payable and particulars on how that determination was calculated. The trustee will usually include a schedule for the payment of the assessed contributions over the remaining months of the assessment period.
Is this a legal obligation?
Yes. Issuing a notice of determination creates a legally obligation to pay the contribution. The trustee has the power to nominate when the payments are to be made and the debt can be collected from the bankrupt as a debt due. This right remains after the bankrupt has been discharged, meaning that the bankrupt can be re-bankrupted for nonpayment of any contribution.
Can the assessment be reviewed?
Yes. The Act provides a mechanism for any assessment to be reviewed by the Inspector General, but the request for a review must be made within 60 days of the assessment. The Inspector General will then have 60 days to decide whether the assessment should be reviewed and make that review. The decisions of the Inspector General may be reviewed by the Administrative Appeals Tribunal.
What can the trustee do to enforce collection?
If an assessment is made and the bankrupt refuses or neglects to pay, the trustee can:
(a) issue notices to employers or other people that owe the bankrupt money to garnishee those monies.
(b) issue an objection to the discharge of the bankrupt, extending the bankruptcy period;
(c) restrict the bankrupt from traveling overseas;
(d) re-bankrupt a discharged bankrupt, if the refusal to pay occurs after the bankrupt has been discharged; or
(e) issue a notice under the supervised account regime provisions of the Act.
What is the supervised account regime?
Trustees may determine that the supervised account regime be activated. This requires the bankrupt to open a supervised account into which they must deposit all of their income. The trustee then supervises all withdrawals from that account to ensure that income contributions are made. The threat of these provisions generally encourages a bankrupt to make contributions as required.
For more detailed information:
Disclaimer
The enclosed information is of necessity a brief
overview and it is not intended that readers should rely
wholly on the information contained herein. No warranty
express or implied is given in respect of the information
provided and accordingly no responsibility is taken by
Worrells or any member of the firm for any loss resulting
from any error or omission contained within this
fact sheet.
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Last Update: 1.3.2010