Bankruptcy and Income

Based on the contribution of Andrew George and Colette Legeret for the NT Law Handbook, as amended by Graeme Blank of Blackburn Chambers and current to 18 January 2018

What happens to the bankrupt's income?

Contributions to trustee

Bankrupts who earn above a certain amount must make some payments (contributions) from their income to their trustee.

Definition of income

The Bankruptcy Act defines income broadly. Examples include a pension paid from a superannuation fund and fringe benefits such as subsidised rent or use of a company car (see s 139L of the Bankruptcy Act).

Actual income threshold amounts

The net income that a bankrupt can earn before being required to make contributions is called the actual income threshold amount (''AITA”). The AITA for a bankrupt with no dependents as at January 2018 was $55,837.60 net per year (indexed). The bankrupt's AITA is made up of all income derived during the assessment period, less any income tax payable and less (with certain limits) any amount due for child support, plus any income tax refunds and plus relevant percentage increases for dependents' income. AFSA website (at www.afsa.gov.au) keeps an updated table showing the current AITA amounts.

If the bankrupt has one dependant, their income threshold is increased by 18%; by 27% for two dependants, by 32% for three, by 34% for four, and by 36% for more than four dependants (at January 2018 $75,939.14) (see s 139K of the Bankruptcy Act).

Definition of dependant

Section 139K of the Bankruptcy Act defines a dependant as someone who lives with the bankrupt, is wholly or partly dependent on the bankrupt and does not earn more than the 'prescribed amount'. The current prescribed amount is $3,581 (indexed).

EXAMPLE: A bankrupt has one child who is wholly dependant. The bankrupt's net income is $70,000 per year. The bankrupt's actual income threshold = $65,888.37. The bankrupt's income exceeds their actual income threshold by $4,111.63, so the bankrupt must contribute 50%, i.e. $2,055.82, to the trustee in that year.

Applying to vary income contributions on hardship grounds

The bankrupt can apply in writing to the trustee to have their income contribution varied on the basis of hardship, for reasons such as ongoing medical expenses, the need to pay for child care in order to work, or the expense of paying for private rental accommodation (see s 139T of the Bankruptcy Act).

If the bankrupt is not happy with the trustee's response, or if the trustee does not make a decision after 30 days, the bankrupt can:
  1. Request the Inspector-General to review the trustee's decision, and apply to the AAT if not satisfied with the Inspector-General's decision; or
  2. Apply directly to the AAT for a review of the decision if the Inspector-General refuses a request to review the decision (see s 139ZF of the Bankruptcy Act).
Please note that there is a cost involved if you appeal the decision to the AAT, however you may be eligible to pay a significantly reduced fee.

See Milsom and Official Receiver in Bankruptcy [2004] AATA 275 (16 March 2004) and Pescott and Inspector-General in Bankruptcy [2013] AATA 680 (24 September 2013) for examples of a successful application to the AAT by a bankrupt.

Providing annual statements of income to the trustee

A bankrupt must provide a statement of income (with supporting documents) at the end of each 12- month period after the date of bankruptcy. A trustee can file an objection to the bankrupt's discharge from bankruptcy if the bankrupt fails to provide the statements of income (see s 170A of the Bankruptcy Act).

Failure to pay a contribution: the supervised account regime

If (and only if) a bankrupt fails to pay the whole of their income contribution, or an instalment of their contribution, at or before the time it becomes payable, the trustee may determine that the supervised account regime applies to the bankrupt (see s 139ZIC of the Bankruptcy Act). Upon determining that the supervised account regime applies to a bankrupt, the trustee is required to provide the bankrupt with a written notice requiring the bankrupt to open a supervised account within the time specified in the notice (being a minimum of 10 working days after the notice is given to the bankrupt). The supervised account must comply with certain requirements set out in s 139ZIE of the Bankruptcy Act.

The supervised account regime requires the bankrupt to open an account (the supervised account) into which all of their income must be deposited. If the bankrupt receives their income by cash (the trustee must consent to this form of income) or cheque, they must deposit it into the supervised account within five days of its receipt (see s 139ZIF of the Bankruptcy Act).

In general, a bankrupt to whom the supervised account regime applies, must not make withdrawals from the supervised account without the consent of the trustee (see s 139ZIG of the Bankruptcy Act). Accordingly, it is necessary for a bankrupt to reach agreement with the trustee in relation to the amount that may be withdrawn from the supervised account for living expenses.

A bankrupt may be liable to criminal penalties if they breach the requirements of the supervised account regime (see ss 139ZIE, 139ZIF, 139ZIG, 139ZIH, 139ZIHA and 139ZII of the Bankruptcy Act).

In accordance with the meaning of 'reviewable decision' in s 139ZIB of the Bankruptcy Act, certain decisions of the trustee in relation to the supervised account regime are reviewable by the Inspector-General and/or the AAT (see relevant ss 139ZIO and 139ZIT of the Bankruptcy Act). These include the decision to subject a bankrupt to the supervised account regime and the decision to withhold consent in relation to the bankrupt making a withdrawal from the supervised account.

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