Revised Explanatory Memorandum
(Circulated by authority of the Attorney-General, the Honourable Philip Ruddock MP)Schedule 2 - Amendments relating to income contributions
The amendments contained in this Schedule will introduce the supervised account regime for bankrupts liable to pay income contributions. These amendments are designed to ensure that the trustee has access to the bankrupt's income to the extent necessary to collect assessed income contributions. Generally, this will be achieved by allowing the trustee, where necessary, to require the bankrupt to deposit all of his or her income into a new account to be supervised by the trustee.
Item 1: After subsection 125(2) and Item 2: Subsection 125(3)
Items 1 and 2 propose to amend section 125 of the Bankruptcy Act 1966 (the Bankruptcy Act) to ensure it does not apply to accounts opened by a bankrupt who becomes subject to the new regime. Section 125 provides that, where a prescribed organisation (a bank, co-operative society or other financial institution of a kind prescribed by the regulations for the purposes of this definition) which becomes aware that an undischarged bankrupt has an account with it, the organisation must notify the trustee of the account's existence and must not make further payments out of the account without a Court order or instructions from the trustee. It would be inappropriate for this requirement to apply to a new account opened for the purposes of the supervised account regime.
Item 3: At the end of section 139L
Item 3 proposes to amend the meaning of 'bankrupt' for the purposes of the definition of 'income' in section 139L so that it includes a discharged bankrupt who remains subject to the supervised account regime.
Item 4 proposes to insert new Subdivision HA in Division 4B of Part VI of the Bankruptcy Act. The new Subdivision will establish the supervised account regime for collection of income contributions.
The objects of the Subdivision are set out in proposed section 139ZIA
Proposed section 139ZIB provides definitions of a number of terms for the purposes of the new Subdivision.
Proposed subsection 139ZIC(1) will provide that a trustee may determine that the supervised account regime applies to a bankrupt. Where the trustee makes that determination, the trustee must give written notice to the bankrupt.
Proposed subsection 139ZIC(2) will provide that the trustee must not make a determination unless, at the time of making the determination, the bankrupt is liable to pay an income contribution and either:
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- if the contribution is payable by installments, the bankrupt has not paid the whole of an instalment when it became payable, or
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- if the contribution is payable at a specified time, the bankrupt has not paid the whole of the contribution at that time.
It is intended that the bankrupt should have an opportunity to comply voluntarily with the obligation to pay contributions on time and that the trustee should apply the supervised account regime in cases in which it would appear to be the most effective method of ensuring that contributions are paid.
The notice given under subsection (1) must be in the approved form (defined in subsection 5(1) to be a form approved by the Inspector-General) - proposed subsection 139ZIC(3). Proposed subsection 139ZIC(4) will provide that the notice must also be accompanied by:
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- a supervised account notice relating to the bankrupt (defined in subsection 139ZIE(1)), and
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- a statement setting out the effect of sections 139ZIE to 139ZIT and any other information specified in the regulations.
Proposed subsection 139ZID(1) will allow the trustee to revoke a determination made under section 139ZIC. The trustee must not revoke the determination unless satisfied that the bankrupt will pay current and future contributions on time. In forming that view, the trustee, under proposed subsection 139ZID(2), is to have regard to the bankrupt's past payment record and any other relevant matters (which may include the bankrupt's explanation for failing to make payments on time, changes in the bankrupt's employment situation and other factors affecting the bankrupt's ability and willingness to make payments on time).
The trustee may revoke a determination on his or her own initiative or on application by the bankrupt - proposed subsection 139ZID(3). Where the bankrupt applies for revocation and the trustee refuses, the trustee must give the bankrupt written notice of the refusal - proposed subsection 139ZID(4). A notice of revocation must be in the approved form - proposed subsection 139ZID(5). A trustee's refusal to revoke a determination will be a decision reviewable by the Inspector-General ('reviewable decision' is defined in proposed section 139ZIB).
Proposed section 139ZIDA describes the circumstances in which the trustee's determination ceases to be in force. These circumstances are the annulment of the bankruptcy and discharge from bankruptcy where there is no further liability to pay a contribution. Where the bankrupt is discharged from bankruptcy and has an outstanding contributions liability, the determination will cease to be in force only when the bankrupt is no longer liable to pay a contribution.
Proposed section 139ZIE describes the requirements of a supervised account notice and the bankrupt's obligations upon receiving such a notice. The notice must be in the approved form and will require the bankrupt to open an account that complies with the features listed in proposed subsection 139ZIE(1). These features are designed to ensure that the trustee has access to the account (including for the purposes of issuing a notice under section 139ZL requiring payment of contributions from the account) - for example, the account must be kept with an ADI (authorized deposit-taking institution as defined in subsection 5(1)) and be kept in Australia. The features are also designed to maximize the balance in the account - for example, the account must be designed not to have a debit balance (so that it cannot include an overdraft or similar facility).
The notice will require the bankrupt to open the account within 10 working days after the notice is given. The trustee may specify a longer period in the notice - that may be appropriate where, for example, the bankrupt's affairs are particularly complex and it will take longer than 10 working days to rearrange those affairs and comply with the notice.
Proposed subsection 139ZIE(3) will require the bankrupt to comply with a supervised account notice. Proposed subsection 139ZIE(5) will require the bankrupt, where the supervised account regime applies, to notify the trustee in writing of details of the account - that notice must be given within 2 working days after opening the account. Pursuant to proposed subsection 139ZIE(6), failure to comply with either subsection (3) or (5) will be an offence.
Proposed section 139ZIEA will allow the trustee to revoke a supervised account notice, issue a fresh supervised account notice and require the bankrupt to transfer the balance of an existing supervised account to the account opened in accordance with the fresh notice. The earlier notice will remain in force until the bankrupt complies with the fresh notice by opening a new supervised account. This power is to cover circumstances in which the financial institution with which the original account is held changes the rules relating to that account so that the trustee considers that account is no longer suitable for the purposes of this regime - for example, the institution may increase the fees payable for operating or making withdrawals from that account which will have the effect of reducing the amount available to collect the bankrupt's contributions liability.
A decision to issue a revocation notice and issue a fresh notice may be made by the trustee on his or her own initiative or on application by the bankrupt. If the bankrupt applies to the trustee to exercise this power and the trustee refuses, the trustee must give written notice of that refusal to the bankrupt. A decision by the trustee to refuse to exercise this power upon application by the bankrupt will be reviewable by the Inspector-General.
Failure to comply with the requirements of a notice issued under this section will be an offence.
Bankrupt's monetary income to be deposited to supervised account
Proposed section 139ZIF will require a bankrupt to whom the supervised account regime applies to ensure that all monetary income actually received by the bankrupt after the account is opened in deposited into the account. Income received in the form of cash or cheque must be deposited to the account within 5 working days of its receipt. In any other case, the income must be deposited upon its receipt. Income received as cash which is used to make a refund is not required to be deposited to the account.
A person who fails to comply with these requirements will be guilty of an offence.
Trustee to supervise withdrawals from supervised account
Proposed section 139ZIG deals with withdrawals from the supervised account. Subsection (1) will impose a general prohibition on withdrawals by the bankrupt. Subsection (2) will provide exceptions to this general prohibition.
The first of these exceptions relates to withdrawals made with the consent of the trustee. Subsection (3) will allow the trustee to consent to withdrawals. The trustee will be required to give written notice of this consent to the bankrupt. That consent can be given to any of the following withdrawals:
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- a specified withdrawal;
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- withdrawals included in a specified class of withdrawals;
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- withdrawals up to a daily, weekly, fortnightly or monthly limit ascertained in accordance with the notice.
The purpose of these provisions is to allow the trustee to come to an arrangement with the bankrupt allowing for regular withdrawals from the account to meet the bankrupt's living expenses while ensuring that the balance of the account remains sufficient to meet the bankrupt's liability to pay contributions. Generally, it is intended that the trustee would consent to regular or periodic withdrawals from the account and that the trustee would consent to the bankrupt withdrawing amounts in excess of that required to meet the contributions liability. In addition to this ongoing consent to meet living expenses, the trustee may also consent to additional withdrawals to meet unexpected liabilities or where a balance has accumulated in the account which exceeds the amount required to meet the bankrupt's contributions liability.
The trustee will be able to vary or revoke a consent as the circumstances require. The power to issue a consent notice or to vary or revoke that consent may be exercised by the trustee on his or her own initiative or upon application of the bankrupt. If the bankrupt applies to the trustee to exercise this power and the trustee refuses, the trustee must give written notice of that refusal to the bankrupt. A decision by the trustee to refuse to exercise this power upon application by the bankrupt will be reviewable by the Inspector-General.
In addition to withdrawals made with the consent of the trustee, subsection (2) will also provide a range of other exceptions to the general prohibition on withdrawals by the bankrupt. These will include withdrawals to meet the bankrupt's tax obligations and to make payments of fees and charges imposed by the financial institution in connection with the operation of the account.
A bankrupt who makes unauthorized withdrawals from the account will be guilty of an offence.
This provision will not affect the operation of other garnishee powers (such as those available to trustees under section 139ZL and to the Commissioner of Taxation under the Taxation Administration Act 1953 ).
Constructive income receipt arrangements
Proposed section 139ZIH will restrict the bankrupt's ability to enter into, or continue participating in, constructive receipt arrangements. A constructive receipt arrangement, as defined in proposed section 139ZIB, is an arrangement the effect of which is that income derived by a bankrupt is not actually received by the bankrupt because it is:
- (a)
- reinvested, accumulated or capitalized; or
- (b)
- dealt with on behalf of the bankrupt or as the bankrupt directs.
This provision is designed to ensure that income derived by the bankrupt is actually received by the bankrupt in monetary form so that the supervised account regime can apply effectively and the amount available for payment of the bankrupt's contributions liability is maximized.
Where the supervised account regime applies, the bankrupt will be prohibited from entering into any new constructive receipt arrangement without the consent of the trustee. If the bankrupt was participating in such an arrangement immediately before becoming subject to the supervised account regime, the bankrupt will be required to cease participating in that arrangement as soon as practicable after becoming subject to the regime. The bankrupt will be able to enter into such arrangements, or continue to participate in such arrangements, with the consent of the trustee. The trustee will be required to give written notice of any such consent to the bankrupt and may, by further written notice, vary or revoke that consent.
The power to issue a consent notice or to vary or revoke that consent may be exercised by the trustee on his or her own initiative or upon application of the bankrupt. If the bankrupt applies to the trustee to exercise this power and the trustee refuses, the trustee must give written notice of that refusal to the bankrupt. A decision by the trustee to refuse to exercise this power upon application by the bankrupt will be reviewable by the Inspector-General.
A bankrupt who fails to comply with the requirements of this provision will be guilty of an offence.
Non-monetary income receipt arrangements
Proposed section 139ZIHA will restrict the bankrupt's ability to enter into, or continue participating in, non-monetary income receipt arrangements. A non-monetary income receipt arrangement, as defined in proposed section 139ZIB, is an arrangement the effect of which is that income derived by a bankrupt is not actually received by the bankrupt in monetary form because it is derived in a non-monetary form.
This provision is designed to ensure that income derived by the bankrupt is actually received by the bankrupt in monetary form so that the supervised account regime can apply effectively and the amount available for payment of the bankrupt's contributions liability is maximized.
Where the supervised account regime applies, the bankrupt will be prohibited from entering into any new non-monetary income receipt arrangement without the consent of the trustee. If the bankrupt was participating in such an arrangement immediately before becoming subject to the supervised account regime, the bankrupt will be required to cease participating in that arrangement as soon as practicable after becoming subject to the regime. The bankrupt will be able to enter into such arrangements, or continue to participate in such arrangements, with the consent of the trustee. The trustee will be required to give written notice of any such consent to the bankrupt and may, by further written notice, vary or revoke that consent.
The power to issue a consent notice or to vary or revoke that consent may be exercised by the trustee on his or her own initiative or upon application of the bankrupt. If the bankrupt applies to the trustee to exercise this power and the trustee refuses, the trustee must give written notice of that refusal to the bankrupt. A decision by the trustee to refuse to exercise this power upon application by the bankrupt will be reviewable by the Inspector-General.
A bankrupt who fails to comply with the requirements of this provision will be guilty of an offence.
Proposed section 139ZII will restrict the bankrupt's ability to receive income in the form of cash. This provision is designed to ensure that income received by the bankrupt is able to be identified by the trustee and deposited into the supervised account.
The bankrupt will be able to receive income in the form of cash with the consent of the trustee. The trustee will be required to give written notice of any such consent to the bankrupt and may, by further written notice, vary or revoke that consent.
The power to issue a consent notice or to vary or revoke that consent may be exercised by the trustee on his or her own initiative or upon application of the bankrupt. If the bankrupt applies to the trustee to exercise this power and the trustee refuses, the trustee must give written notice of that refusal to the bankrupt. A decision by the trustee to refuse to exercise this power upon application by the bankrupt will be reviewable by the Inspector-General.
A bankrupt who fails to comply with the requirements of this provision will be guilty of an offence.
Proposed section 139ZIIA modifies the offence contained in section 277A (keeping of books in respect of period of bankruptcy) in relation to a discharged bankrupt who is subject to the supervised account regime. Under section 277A, a bankrupt is required to keep books until discharged from bankruptcy. The supervised account regime may continue to apply after discharge (until the bankrupt no longer has a liability to pay contributions). Therefore, where a bankrupt is subject to the supervised account regime, the obligation imposed by section 277A will continue until that regime ceases to apply to the bankrupt.
Proposed sections 139ZIJ to 139ZIN give the trustee power to apply for a range of injunctions to ensure that a bankrupt who is subject to the supervised account regime complies with his or her obligations under that regime.
Proposed sections 139ZIO to 139ZIT deal with review of trustees' decisions. 'Reviewable decision' will be defined in section 139ZIB and covers all decisions made by trustees under the provisions relating to the supervised account regime. These decisions are subject to review by the Inspector-General and the review process and requirements for requesting a review are based on those already in the Bankruptcy Act which relate to other decisions reviewable by the Inspector-General.
A bankrupt or trustee who is dissatisfied with the Inspector-General's decision may apply to the Administrative Appeals Tribunal for a review of that decision.
Item 5 provides that the proposed amendments made in this Schedule will apply in relation to a bankrupt who is liable to pay a contribution whether the liability arose before, at or after the commencement of this Item. This means the amendments will apply to existing and future bankruptcies as long as the bankrupt is liable to pay an income contribution when the amendments commence.