One of the consequences of being declared bankrupt is that an assessment of the bankrupt’s income is undertaken for each year they remain bankrupt; commencing from the date of bankruptcy until discharge from bankruptcy.
A lot of myths surround the income contribution process. One such myth is that a bankrupt cannot earn an income that exceeds a certain limit during their bankruptcy. This statement is not true.
There is no limit on the amount of money a bankrupt can earn during their bankruptcy.
Income assessments are conducted by using the following formula.
A bankrupt’s assessable income is sometimes different to their taxable income. Whilst salary and wages earned is part of a bankrupt’s assessable income, other funds or benefits received by a bankrupt may also be considered income for the income assessment (even where these amounts are not income for tax purposes) and certain deductions (which may be accepted for tax purposes) will not be permitted.
The Actual Income Threshold Amount (AITA) applicable for income assessments is indexed biannually based on the base pension rate (on 20 March and 20 September) and adjusted if a bankrupt has dependants on a sliding scale, depending on the number of dependants. The current threshold for a bankrupt with no dependants is $68,768.70 (after tax). A person is considered a dependant if they meet the criteria outlined in the Bankruptcy Act, which includes that they must currently earn less than $4,253 per year (this amount is also indexed).
If a bankrupt’s assessable income is less than the applicable AITA, no funds are required to be paid to their bankrupt estate. If a bankrupt’s assessable income exceeds the applicable AITA, they are required to make ‘income contributions’ to their bankrupt estate at the rate of 50 cents in the dollar (on the amount of assessable income that exceeds the applicable AITA).
So that poses a question: Should a bankrupt limit their income during a bankruptcy?
Bankruptcy is a process that allows individuals who cannot pay their debts to make a fresh financial start. The ability to earn an income is important to move towards building financial stability and future financial goals.
If a bankrupt has the capacity to earn an income that exceeds the appliable AITA, it makes sense for them to maximise their earnings and income. After all, even though a portion of their income may need to be paid to their bankrupt estate, the more money a bankrupt earns, the more funds they have available to meet their costs and expenses of living and to save for the future.
For example, below are income contribution assessments conducted on the basis a bankrupt has two (2) dependants at different levels of income.
Assessable Income (after tax)
AITA (2 dependants)
Income Contribution Liability
Income Retained by Bankrupt
*Figures current as at 22/9/2023 and may change in the future due to ongoing half-yearly indexation
As you can see from the above, although the bankrupt earning $125,000 per year is required to pay income contributions of $1,923.38 to their bankrupt estate, they are able to earn and retain an additional $14,226.63 (after tax and payment of the contributions) from their income in comparison to the bankrupt earning $100,000 per year.
If you or your client are facing personal financial difficulty, we encourage you to reach out to your local SV Partners’ office for advice on the impacts of bankruptcy and the income assessment process.