What Constitutes Fringe Benefits When Assessing a Bankrupt’s Income
A trustee in bankruptcy has an obligation to assess whether a bankrupt is required to make income contributions during the period for which they remain bankrupt.
The amount that a bankrupt is required to pay is 50% of their net income over a prescribed threshold. The threshold varies according to the number of dependents and is indexed every six months. Should a bankrupt fall below the threshold, there is no requirement to contribute.
The definition of income includes fringe benefits. This article focuses on the fringe benefits analysis of the assessment with reference to a recent case in the Federal Court of Australia.
Fringe benefits are referenced to the Fringe Benefits Tax Assessment Act 1986 (FBT) with modifications prescribed by the Bankruptcy Act 1966 (Act).
Benefits include:
- Provision of the use of a motor vehicle to a bankrupt owned by a third party;
- Provision of a housing benefit;
- Living away from home allowances;
- Subsidised or free board.
There are formulas set out in the FBT which are also modified by the Act, for working out the value of the benefits received.
Usually, FBT is a tax that relates to a person’s employment, however when it comes to bankruptcy, it includes a “benefit that is provided in any circumstances by any persons to the bankrupt.” This means it is not necessary for the person providing the benefit to be an employer, they may be a family member or spouse.
In a recent case, the Federal Court of Australia determined that legal fees paid on behalf of a bankrupt meets the definition of fringe benefits. This is irrespective of whether or not the matters relate to proceedings that could benefit the administration of the bankrupt estate. The case embraced other concepts including whether unbilled time on a bankrupt’s legal file could be assessed as income.
Whilst we understand that the case is under appeal, parties advising bankrupts should be aware that legal fees paid by a third party for the benefit of the bankrupt may be assessed as income by the trustee.
Should you have a client who is bankrupt and is involved in legal proceedings we would be happy to discuss your client’s position with you.
Call us today on 1800 246 801 or visit svpartners.com.au for more information.
Article written by Hillary Orr (Consultant) – Adelaide