Bankruptcy – income contributions – what is income?
Bankruptcy, of course, entails the statutory “shakedown” of the bankrupt for their divisible assets. For high-income earners, there is also an obligation to pay contributions to the bankrupt estate from their income. This article explores a recent Federal court case and touches on some less frequently seen examples of income.
If it walks, swims and quacks like a duck…
Our client had owned, managed and operated a dental practice for nearly 25 years. Well advised, he had insurances in place to provide for worst case scenarios. One of those came to pass when preparing a backyard barbeque. Having recently undertaken a knife skills course, the good doctor was equipped for the task, however, a mis-step saw him cleaver the top of his left index finger. The circumstances did not allow for re-attachment and he was unable to perform his duties as a dentist without both hands. He was forced to exit his practice leaving him with significant debts and driving his decision to initiate his own bankruptcy.
Had his insurances paid lump sum damages or compensation, they would not have been property divisible among creditors having regard to the exception in section 116(2)(g) of the Bankruptcy Act (the Act) and confirmed in cases such as Berryman v Zurich Australia Ltd WASC 196. However, the policies in this case, were an Income Protection Plan and an Income Replacement Plan which provided for the insurer to pay a monthly benefit until retirement age.
Section 139L of the Act provides that income has its ordinary meaning, goes on to cite 8 examples and 6 exclusions none of which are here applicable. Accordingly, the bankrupt was assessed as having a $270,000 gross annual income from which he was required to pay $55,555 for each of 3 years.
After making the payments for 6 months, Dr Gittins’ research revealed the Berryman case and he took legal advice which led to his application to the Federal Court to revisit the trustee determination. His counsel agreed that the amounts fell within the meaning of income, but asserted that the carve-out in section 116(2)(g) also excluded the sums from being income pursuant to section 139L.
In Gittins v Field (Trustee) FCA 976, Justice Charlesworth considered the authorities in relation to each provision of the Act, noting the overlap between what is property and income under the Act, upholding the trustee’s determination and observed that:
“Had Mr Gittins not lost his earning capacity, his income as a dentist would be subject to the provisions … and.. viewed in that way, it is difficult to see how the creditors of the bankrupt in that situation could be unjustly swelled or advantaged by the application of the income contribution scheme to the Benefits”.
The court also ordered Dr Gittins to pay the trustee’s costs fixed in the sum of $25,000, so all up a $100,000 exercise for the bankrupt.
Other types of Income
Section 139L brings loans made to the bankrupt within the definition of income whether the money is paid to the bankrupt or applied at the bankrupt’s direction. So, if Dr Gittin’s case, his wife or a friend paid his legal costs during the proceedings, those amounts could be added to the bankrupt’s income being assessed.
Meanwhile, section 139Y empowers the trustee to deem the bankrupt as receiving reasonable remuneration from employment or a transaction. So significant works performed by a bankrupt carpenter at the residence of a friend, relative or otherwise may attract an assessment of income.
Housing/rental benefits may be captured under various provisions either for an equivalent market rent (or share thereof) or linked to the extent of the home loan owing in respect to the residence as a loan fringe benefit or residual fringe benefit! A more common fringe benefit attracting the income provision is a motor vehicle benefit calculated by reference to a statutory formula.
While these other types of income arise relatively infrequently, it is not uncommon to see their application particularly in circumstances where the bankrupt is employed by a relative or otherwise self-employed. If you or one of your clients require assistance with any Bankruptcy related matters, please contact your local SV Partners office on 1800 246 801.
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