28 Feb 2019

The power of deeming income contributions


3 min

Investigations reveal $500k earned in 12 months.

Many are aware that the Bankruptcy Act 1966 includes extensive provisions to make bankrupts pay their bankruptcy trustee approximately one-half of their after-tax income that is above a certain threshold. That income contribution becomes a debt to the bankruptcy trustee and survives bankruptcy.

Income under the Bankruptcy Act provisions is not the same as ‘income’ under the Income Tax Assessment Act 1997, it includes usual wages, pensions and distributions but also includes:

  • loans from associated parties

  • benefits as defined under the Fringe Benefits Tax Assessment Act 1986

  • income or consideration received by another party as a result of work done by the bankrupt

  • refunds of tax for post-bankruptcy periods.

Typically, an assessment of the bankrupt’s income is made based on information provided by a bankrupt at the anniversary of their bankruptcy, however in the event that no information or limited information is provided to the bankruptcy trustee (as is sometimes the case) the bankruptcy trustee has the power under the Bankruptcy Act to deem a bankrupt’s income pursuant to section 139P.

A recent case in the Melbourne Office identified the impact that these provisions can have on a bankrupt.

After the bankrupt failed to provide income information for the first year of their bankruptcy, our office took steps to obtain copies of bank statements from accounts held in the bankrupt’s name to determine what monies had been received in the first twelve months. Having reviewed the bank accounts, we discovered a treasure trove of information indicating that the bankrupt received approximately $500,000 during the first twelve months of bankruptcy alone. Each of the credits (approximately 230) followed a similar pattern with narrations referencing loans and or wages.

Armed with this knowledge we sought further clarification from the bankrupt to explain the transactions, after again being met with deafening silence we took steps to deem his income pursuant to Section 139P crystallising a liability in the order of $230,000.

After failing to pay the required contributions, the bankrupt appears to have obtained independent advice to correct the errors of his ways, unfortunately for the bankrupt this led to only one viable alternative, with a second bankruptcy filed and another three years to wait before becoming eligible to be discharged.

Meanwhile, as first bankruptcy trustee we await any potential recoveries from the second bankruptcy to hopefully provide a dividend to creditors of the first bankrupt estate.

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