Compulsory Income Contributions

COMPULSORY INCOME CONTRIBUTIONS

The Bankruptcy Act sets out a regime for the assessment of income whilst you are bankrupt. Subject to criteria you may become liable to pay compulsory income contributions for 3 years whilst you are bankrupt.

Bankruptcy Income & The Statutory Thresholds

There is no limit on the level of income which a bankrupt can earn. However, if you exceed the statutory thresholds (as listed below), you will pay 50% of your after tax bankruptcy income which exceeds the statutory thresholds. The bankruptcy thresholds (which are listed below) are based on the number of dependants you have. A dependent is defined as a person who is dependent on the bankrupt for financial support and doesn’t earn more than $3,539 p.a.

Dependants Before Tax After Tax
0 $74,528 $59,031.70
1 $90,277 $69,657.41
2 $98,722 $74,970.26
3 $103,413 $77,921.84
4 $105,291 $79,102.48
Over 4 dependents $107,168 $80,283.11

*current as at February 2019

Feel free to use our income contribution calculator to see if you may be liable for compulsory contributions. This calculator should only be used as a guide. If you are already bankrupt and you are seeking clarification on an assessment you have received from your Trustee, we recommend that you speak directly with your Bankruptcy Trustee or Bankruptcy Regulation at AFSA.

Income Contribution Calculator

What income is assessed?

A bankrupt’s derived income is to be assessed under the income contribution regime. Income in bankruptcy can be deemed to be derived even if the bankrupt hasn’t actually received the income (refer to Inspector General in Bankruptcy –v- McGushin [2009 FCA 662). The Trustee in Bankruptcy will issue an income contribution assessment as soon as practicable after the beginning of each contribution assessment period. A Trustee in Bankruptcy will therefore typically issue 3 assessments, however, if the bankruptcy term is extended more assessments could be issued.

The following are examples of the types of income which will be included in the income assessment:

  • Annuity or pension from an superannuation fund
  • Termination pay
  • Annuity or pension from an insurance fund
  • Income from a trust fund
  • Fringe benefits
  • Income provided to a third party other than the bankrupt

What income is excluded from an assessment?

The following are examples of income which is not included in an income contribution assessment:

  • Child Support or similar maintenance payments
  • An amount received pursuant to the Social Security Act
  • Legal Aid Scheme payments
  • Family Tax benefits

What type of evidence can a Trustee obtain to assess income?

A Trustee in Bankruptcy may call for supporting information when conducting an income contribution assessment. The type of information the trustee may call for could be:

  • Payslips
  • Bank Statements
  • Group certificates
  • Tax Returns
  • ATO notice of assessments
  • Contract of employment
  • Pension or allowance statement
  • Business Activity Statements
  • Financial Statements

For a self employed bankrupts, the Trustee in Bankruptcy may need to scrutinise these documents in more detail as the Trustee is entitled to deny a deduction for depreciation and donations for the purposes of income contribution assessments.

Fringe Benefits – are they included in the assessment?

If a bankrupt received Fringe benefits (as defined by the Income Tax Assessment Act) then the value of those benefits will be included by Trustee in the income contribution assessment.

The Fringe benefit does not need to be provided by the bankrupt’s employer for it to be assessed as income. The Fringe benefit may be provided by a third party (refer to Skalkos v Nicols [2009] FCA 346). In that case, the court said “it is now quite clear what is included is a benefit that is provided in any circumstances by any person to a bankrupt”.

The following is a list of the most common type of Fringe benefits which would be included by a Trustee in an income contribution assessment:

  • Provision of Motor Vehicle
  • Debt Waiver
  • Interest free or below market interest loan
  • Expense payments (such as educational expenses)
  • Provision of free or low cost housing
  • Provision of free or low cost air travel

The Bankruptcy Act exempts free or low cost housing as long as the value of the housing does not exceed $250 per week.

Review of income assessment

If a bankrupt does not agree with the assessment made by the Trustee, then the bankrupt must make an application to the Inspector General in Bankruptcy (IG) within 60 days of receiving the notice of assessment from the Trustee. If the bankrupt is dissatisfied with the IG’s decision, then the bankrupt can make an application to the Administrative Appeals Tribunal.

Collection of Income Assessments

If a bankrupt fails to pay the income contributions (as assessed) by the Trustee, then the Trustee can make an application to the Official Receiver under Section 139ZL and garnishee the bankrupt’s wages. The value of the garnishee could be approximately 20% of the bankrupt’s wages until the outstanding contributions are paid in full.

Furthermore, if the bankrupt fails to pay the income contributions (as assessed) by the Trustee, the Trustee can file an objection to the bankrupt’s automatic discharge. This could result in the bankrupt’s bankruptcy term being extended to 8 years in total.

Restrictions on advice & assistance

This area of bankruptcy law is very complicated and this site only provides an outline of the key aspects of the regime. If you are already bankrupt and you are seeking clarification on an assessment you have received from your Trustee, we recommend that you speak directly with your Bankruptcy Trustee or Bankruptcy Regulation.

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