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01 Jun 2007

Contributions from a Bankrupt's Income - Part 1


3 min

When someone is made bankrupt all of their property (with certain exceptions) vests in the trustee. Also any property acquired by the bankrupt after bankruptcy (after-acquired property) vests in the trustee when acquired.

But, income earned after bankruptcy is not property that vests in the trustee. Why? No bankrupt would work and earn an income if it was paid to the trustee. The best a trustee used to be able to do was to convince the court that the bankrupt was earning more than sufficient money to support themselves and their family, and that part of the income should be paid to the estate.

In 1992 the Bankruptcy Act received extensive provisions that made bankrupts with high incomes liable to pay contributions to their trustee. The short version of the provisions is that a bankrupt must pay to the trustee one-half of their after-tax income that is over and above a certain threshold. This contribution becomes a debt due to the trustee, it survives discharge and the bankrupt may be re-bankrupted if the contribution is not paid. More on this later.

'Income' under the provisions of the Bankruptcy Act is not the same as 'income' under the taxation Acts. It includes the usual wages, pensions and distributions, but also includes:

  • Loans from associated parties
  • Benefits as defined under the Fringe Benefits Tax Assessment Act (FBTAA)
  • Income or consideration received by another party as a result of work done by the bankrupt
  • Refunds of tax for post-bankruptcy periods

The Bankruptcy Act imports all of the FBTAA provisions as they existed in 1992. Any fringe benefit received becomes income and there does not have to be a employee-employer relationship for it to apply. Examples of benefits that can become income are:

  • An overseas trip paid for by someone else
  • the use of someone else's motor vehicle for little or no cost
  • Even living rent-free in a spouse's residence

The value of the benefit can be calculated and added to the bankrupt's other income for the year.

The amount of income assessed is then reduced by any income tax payable on that income, and any child support payments made under the relevant Act (up to the maximum provided for under that Act). This results in a calculation of the amount of income on which the bankrupt will be assessed.

Next month - Deemed Income, Thresholds & Dependants

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