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Income contributions: How is income affected during bankruptcy?

Each year income is assessed to determine if a contribution from that income is payable to creditors. This factsheet outlines the basics of how income contributions work during a bankruptcy.

Can a bankrupt work during their bankruptcy?
Yes. In most cases, a bankrupt is able to earn an income during their bankruptcy. Subject to some provisions and exceptions, a bankrupt is encouraged to earn an income, as there is no logical reason why they should not be entitled to earn an income and benefit from it. The Bankruptcy Act 1966 states a bankrupt must pay contributions from their income to their estate if the amount earned is over the relevant threshold prescribed by the Australian Financial Security Authority (AFSA).

What are income contributions?
Under section 139P of the Bankruptcy Act, a bankrupt may be liable to make a contribution—subject to thresholds and number of dependents—to their bankrupt estate from income earned during their bankruptcy. It is fitting that some of the income from the bankrupt’s efforts during the bankruptcy are used to satisfy their past debts.

What income is assessed for contributions?
A bankrupt’s income is assessed to determine whether contributions must be paid. Section 139L of the Bankruptcy Act sets out the definition of income to be assessed.

The definition of ‘income’ is the same as under the Taxation Acts, but it also includes amounts that have not been earned from physical exertion or investments, and amounts that may not even be taxable income. These ‘other incomes’ include loans made to the bankrupt, items that fall under the Fringe Benefit Tax provisions, annuities and pensions, as well as some insurance payments.

Is all money earned income?
No. Many amounts are not income for contribution assessment purposes. These are set out under paragraph (b) of section 139L of the Bankruptcy Act.

Are any amounts deductible from after-tax income?
Yes. Deductions are available for payments made to support a child, if paid under a Family Law Act 1975 maintenance agreement or order. Deductions are also available for certain business expenses under section 139N of the Bankruptcy Act.

How does the trustee obtain information about a bankrupt’s income?
A bankrupt is required under the Bankruptcy Act to provide their income details to their trustee. Usually, a trustee will send a form to the bankrupt on each bankruptcy date anniversary. This form must be completed and returned with any documentation supporting the income earned and deductions claimed.

What if the bankrupt does not complete the form?
Under the Bankruptcy Act, it is an offence if a bankrupt does not cooperate with their trustee and complete their income assessment form. If a bankrupt does not cooperate, the trustee can object to the bankrupt’s discharge from bankruptcy (i.e. extend their bankruptcy period) and estimate the bankrupt’s income and assess it accordingly.

Can the trustee investigate the bankrupt’s income information?
Yes. While a trustee can make an assessment on what they reasonably believe is a bankrupt’s income, in practise they investigate thoroughly before making an assessment. If the bankrupt supplies inadequate or questionable information, a trustee will seek further information.

If appropriate, a trustee can conduct an examination and request that the bankrupt provide further information to clarify any matter. If further information is not forthcoming, the trustee can make the assessment on what they reasonably believe the income is, putting the onus on the bankrupt to disprove the assessment.

How is the income contribution calculated?
The contribution calculation is made on assessed income, which is the amount of income left after tax, the Medicare levy and proper deductions. A contribution is payable if the assessed income is more than AFSA’s current statutory threshold. The threshold amounts are based on the number of dependents that the bankrupt had during that assessment period—refer to our Thresholds webpage (www.worrells.net.au/thresholdsresources/thresholds.aspx).

A trustee is entitled to receive one-half of the balance over the threshold amount (i.e. the ‘over threshold after tax income’ is divided equally between the bankrupt and trustee). The formula is:

(Assessed Income – Actual Income Threshold Amount) ÷ 2

How is the assessment made?
The trustee makes an assessment of the estimated income based on information the bankrupt supplies at the beginning of the assessment period. An assessment (called a ‘determination’) is made on these estimates and the bankrupt becomes liable to pay any contributions to the trustee from the assessment date.

At the end of the assessment period, the bankrupt must supply the past year’s actual income amount, along with their estimates for the next year. The past year’s assessment is adjusted if necessary, then a new assessment is made for the next year’s estimated income and the process starts again.

How often are the assessments made?
Each assessment period runs from the date of the bankruptcy or its anniversary, and ends on the day before the next anniversary. Assessment periods continue until the bankrupt is discharged, including when a bankruptcy is extended through an objection to discharge.

What happens to the money paid under an assessment?
Money paid under these provisions is paid into the estate funds for the benefit of the bankrupt’s creditors.

What obligations does the bankrupt have?
A bankrupt must provide information about their income and deductions, and give the trustee access to all required books and records. If the bankrupt refuses or fails to supply requested books or records, the trustee can lodge an objection to the bankrupt’s discharge and AFSA may prosecute the bankrupt for an offence.

How does the bankrupt get a notice of the assessment?
Once a determination is made, the trustee gives a notice to the bankrupt setting out the amount payable and particulars on how the determination was calculated. Usually, a trustee will include a schedule of contribution payments over the remaining months of the assessment period.

Is an assessment notice a legal obligation?
Yes. Issuing an assessment notice creates a legal obligation to pay the contribution. A trustee can nominate when the payments are due and can be collected from the bankrupt as a debt due. These rights remain after the bankrupt has been discharged, which means that the bankrupt can be re-bankrupted for non-payment of any contribution.

Can the assessment be reviewed?
Yes. The Act provides a mechanism for any assessment to be reviewed by the Inspector-General, but the request must be made within 60 days of the assessment. Upon receipt the Inspector-General has 60 days to decide whether the assessment should be reviewed and make a ruling. The decisions handed down by the Inspector-General can be reviewed by the Administrative Appeals Tribunal.

What can the trustee do to enforce collection?
If an assessment is made and the bankrupt refuses or fails to pay, the trustee can:

  • issue notices to employers or other people that owe the bankrupt money to garnishee those monies (i.e. order third parties to withhold monies owing to the bankrupt)
  • issue an objection to the discharge of the bankrupt, extending the bankruptcy period
  • prohibit the bankrupt from travelling overseas
  • re-bankrupt a discharged bankrupt, if the refusal to pay occurs after the bankrupt has been discharged
  • issue a notice under the Bankruptcy Act’s supervised account regime provisions.

What is the supervised account regime?
Trustees may determine that the supervised account regime is needed. This requires a bankrupt to open a supervised account where they must deposit all of their income. The trustee then supervises all withdrawals from that account to ensure that income contributions are made.

The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

Last Updated: 3.11.2017