INCOME CONTRIBUTIONS AND BANKRUPTCY
Will Bankruptcy affect my employment?
The answer is no! Bankruptcy does not restrict you from being employed and earning and income. If you are bankrupt, you do not need to disclose your bankruptcy to your employer.
That said, an employer may request this information or choose to search the National Personal Insolvency Index to find this out. Also, some professional associates and licensing authorities have their own conditions and rules surrounding members who are bankrupt. You should ask the organisation that you are a member of, whether bankruptcy affects it members, and their ability to practice a particular trade.
What is the “prescribed threshold”?
The prescribed threshold that applies to you will depend on how many dependants you have. The Bankruptcy Act defines a dependent as a person who satisfies all three of these criteria:
- the person resides with you
- the person is wholly or partially dependent on you for economic support
- the person’s income is less than a certain amount.
What happens to my income while I am bankrupt?
If your after-tax income exceeds a certain amount, you will have to pay contributions to your trustee. You will be required to pay half of the amount you earn above the “prescribed threshold” to your trustee. Your trustee will calculate the amount you are liable to pay for each year of your bankruptcy and will send you an assessment which outlines the amount to be paid, the instalments (if applicable) and how to make your payments.
What is 'assessed income'?
In bankruptcy income differs from the Australian Taxation Office’s assessment of taxable income. The trustee’s assessment will include, and is not limited to, consideration of your:
- wages and salary from all jobs;
- tax refunds;
- taxable fringe benefits;
- salary sacrifice arrangements;
- superannuation receipts, annuities and pensions;
- business profits;
- loans from associated entities;
- income you earn which is paid to someone else (including to a company or trust);
- superannuation contributions in excess of 9% made by an employer that arise from an industrial agreement solely between you and your employer; and
- income earned overseas.
What happens if I do not pay my income contribution?
If you do not comply with your trustee’s payment schedule, the trustee may consider one or all of the following:
- automatically deducting funds from your income or bank account without your consent (garnisheeing);
- objecting to your discharge and extending your bankruptcy by five years and assessing additional contributions for this period;
- obtaining a judgment for unpaid contributions and taking enforcement action against you after you are discharged; or
- requiring you to open a supervised bank account into which all your income must be paid and from which any withdrawals must be authorised by the trustee.
Am I able to be a Director or Secretary of a Company if I am Bankrupt?
Under the Corporations Act, bankrupts are prevented from managing corporations unless they obtain approval from the court. The Corporations Act is administered by the Australian Securities and Investments Commission (ASIC) and enquiries about companies should be directed to ASIC.
If I have to pay contributions, how much will I have to pay?
You will be assessed to pay half of the amount by which your after-tax income exceeds the prescribed threshold amount. Simply put for every dollar over the threshold you will have to contribute 50 cents to the bankrupt estate.
How are contributions calculated?
At the start of your bankruptcy your trustee will calculate whether you will be required to pay any income contributions during the first year of your bankruptcy. Also, the trustee will repeat that process at the start of each subsequent year of your bankruptcy.
It is important to note that 'income' for income-contribution purposes under the Bankruptcy Act has a wide meaning and includes certain amounts that are not included in taxable income.
Are business expenses included in the bankruptcy income assessment?
Expenses will be treated differently by your trustee compared to how the Australian Taxation Office treats them. Expenses will be determined based on the specific circumstances.
What if I can’t pay my bankruptcy income contributions? Am I able to apply for hardship?
You are able to apply for hardship under specific provisions in the Bankruptcy Act which are limited to “exceptional circumstances” that would impose an excessive financial burden. The list of what constitutes 'hardship' for the purposes of the Act is specific, and your trustee does not have the ability to grant hardship for expenses that aren’t listed in the Bankruptcy Act: The “exceptional circumstances” are:
- ongoing medical expenses;
- costs of child day care essential for work;
- particularly high rent when there are no alternatives available;
- substantial expenses of travelling to and from work; and
- loss of financial contribution, usually made by your spouse, to the costs of maintaining your household.
Applications for hardship must be in writing, must explain why you will suffer hardship and must include documentary evidence of your income and expenses. Your trustee will decide on your application within 30 days after receiving your application and sufficient supporting evidence and will give you a written notice setting out the reasons for their decision.