How is it calculated and what does it include?
Background
A bankrupt may be required to a contribute part of their income to their bankrupt estate under section 139P(1) of the Bankruptcy Act 1966.
Section 139S of the Bankruptcy Act also provides that if a bankrupt’s income exceeds the statutory threshold then the bankrupt is liable to pay half the surplus income above the threshold to the bankruptcy trustee as a contribution, as per the following formula:
Income – (minus) income threshold amount / (divide by) 2
Income is defined in section 139L of the Bankruptcy Act and is due to be assessed on the anniversary of the bankruptcy’s commencement date, for each year of the bankruptcy. The bankruptcy trustee collects the funds into the estate for the benefit of creditors.
Threshold amounts
The threshold amounts are prescribed bi-annually by the Australian Financial Security Authority (AFSA) and are based on the number of dependents that the bankrupt had during the assessment period. Currently, the thresholds are:
| Number of dependants | Income limit |
| Zero dependants | $55,837.60 |
| One dependant | $65,888.37 |
| Two dependants | $70,913.75 |
| Three dependants | $73,705.63 |
| Four dependants | $74,822.38 |
| More than four dependants | $75,939.14 |
Superannuation rules
Superannuation funds received after the date of bankruptcy are protected from being realised in the bankruptcy. However, section 139L(1)(a)(i) of the Bankruptcy Act extends the income definition to include an annuity or pension paid to the bankrupt from a superannuation fund. In this scenario, the bankruptcy trustee would add that amount to the bankrupt’s income to calculate whether the bankrupt has a liability to pay an income contribution.
A lump sum payment from a superannuation fund is often debated (e.g. a lump sum superannuation payment because of employment termination) as to whether it forms part of the section 139L definition as it’s not specifically mentioned. Therefore, arguably it may not be considered income, and not part of the calculation of the bankrupt’s liability for income contributions.
The distinction between an income stream and a lump sum largely depends upon the definitions in the trust deed and/or the Superannuation Industry (Supervision) Act 1993 (SIS Act) and seems to revolve around the payment’s regularity. Most superannuation trust deeds allow an annual payment to be an income stream, which means that if a bankrupt takes a yearly lump sum payment then it is likely to be assessed as an income contribution. However, it could be argued that a lump sum payment taken in year one of the bankruptcy, but not in subsequent years, is not an income stream.
If a bankrupt makes payments into a superannuation fund from their income:
- Bankruptcy Regulation 6.12B(1)(a) provides that compulsory superannuation payments are not considered income.
- Any voluntary superannuation contributions (e.g. where the bankrupt salary sacrifices) are considered income. See Thomas Robbins and Insolvency & Trustee Service Australia (AAT 13585, 24 December 1998).
Consequently, when a bankruptcy trustee assesses a bankrupt’s liability for income contributions, compulsory superannuation contributions must be excluded. However, should the bankrupt elect their employer to contribute extra income into superannuation, then the bankruptcy trustee can include those into the income calculation even though the bankrupt cannot access those funds until retirement age.