Dependants to be or not to be in Bankruptcy – Assessing Dependants in Bankruptcy

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Dependants to be or not to be in Bankruptcy – Assessing Dependants in Bankruptcy

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A Trustees’ decision whether a person is a dependant or not can affect the ability of a bankrupt to reduce their income contributions liability.

From a trustee perspective, assessing the liability is sometimes challenging, particularly with consideration as to whether a person is a full dependant of the bankrupt or not at all during a contributions period.

 

Is the Person a Dependant?

A person is a dependant pursuant to s139K of the Bankruptcy Act 1966 (Cth) (BA­), if and only if the person meets all three of the following conditions, they:

  1. Reside with the bankrupt;
  2. Partly or wholly depend upon the financial support of the bankrupt; and
  3. their income is less than the level of income decided by the Bankruptcy Regulations, 2021.

If a bankrupt only has a dependant for part of the year, even if the person satisfies all three conditions, the Act does not appear to allow the trustees to include the person as a partial dependant.  The Australian Financial Security Authority (AFSA), as the government regulator in this area, has set out its position as being “that a person is a dependant for a whole contribution period or not at all”.

It is only relevant if the person is financially dependent partially on the bankrupt during the contributions period. In the contributions period, the requirement to reside with the bankrupt is the key.

 

What does ‘resides with bankrupt’ mean?

There is no definition of ‘reside’ in the Act.

Case precedents suggest a test of intention and nature of arrangement of the parties may be used to indicate whether a person resides with the bankrupt.

The High Court has previously (add as reference: Koitaki Para Rubber Estates Ltd v Federal Commissioner of Taxation [1941] 64 CLR 241, Williams J) observed that an individual may reside in more than one place. As a result it is possible that a dependant individual may reside with more than one person/bankrupt.

AFSA has expressed its view that in the case of a child, it will be relevant to consider how frequently the child stays with the bankrupt, and the nature of the arrangements provided by the bankrupt for the child.  It should be considered whether the child considers that they are merely visiting the bankrupt on a regular basis, or have a second home with the bankrupt. Further, there should be consideration whether the bankrupt maintains a bedroom for the child, together with a supply of clothes, toys etc.

 

Scenario 1

We have a case where a bankrupt shared parenting with his former wife.

The bankrupt claimed his son and daughter were dependants because they lived with him regularly.

The trustee investigations revealed that:

  1. the children stayed with the bankrupt up to two days per fortnight;
  2. the bankrupt did not have a separate bedroom, had minimal clothing and toys for his children; and
  3. the nature of the arrangement was to let the children spend time with the bankrupt during the agreed days, school holidays, and Christmas.

The trustee initially took the view that the Child Support Agency payments were “deductible” in the assessment and that a proportionate approach be taken so as to allow deduction for one dependant (rather than two). The children did not appear to consider the bankrupt’s rented place as their second home and the daughter attended even less frequently than the son. On that basis, the trustee considered the children did not meet the test of “reside” even though other conditions were met. The bankrupt sought a review of the trustee’s decision which prompted the trustee to revise his position, accepting that the CSA deduction applied and the son and daughter were both to be treated as dependants.

The reasons the Trustee reviewed his initial decision to include both children as dependant were that:

    1. The Act does not appear to allow the trustee to include a person as a partial dependant (i.e. in this scenario, one of the children stayed with the bankrupt only for part of the year – not the whole year);
    2. AFSA has indicated its position to the trustee that when assessing income contributions, a person is to be assessed as a dependant for the whole contributions period or not at all.

 

Scenario 2

In another case, a bankrupt lived with his three adult children during his Contribution Assessment Period (CAP) 1.

In CAP 2, the bankrupt informed the trustee that two of his children moved out from home in the first four months of the CAP 2 period.

The two children were partially dependent on the bankrupt financially and their income was less than the level of income decided by regulations.

In this case, how many children are considered dependants of the bankrupt in the CAP 2 period?

Here is the catch – there is no partial dependant in the assessment of income contributions.

The fact that the children lived with the bankrupt for part of the CAP is sufficient for the children to be ‘residing’ with the bankrupt.

The trustee assessed the three children to be dependants for the CAP 2 period.

 

Key Takeaway

A dependant for part of a contributions period will not trigger apportionment of income.

Assessment on income will change only when a person is decided as a full dependant.

During the contributions period, the requirement to reside with the bankrupt is a key.

Case precedents suggest intention of the parties regarding residence and the nature of the arrangement between the parties may be used to indicate whether a person resides with the bankrupt. AFSA’s position appears sound in relation to child dependants. However, Trustees are likely to be more cautious in relation to adult dependants.

 

Article written by Elny Martin, Manager – Perth

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