House of Representatives

Revised Explanatory Memorandum

(Circulated by authority of the Attorney-General, the Honourable Philip Ruddock MP)

Section 2 - Policy objectives

The amendments will address longstanding issues concerning the interaction between bankruptcy and family law which have created uncertainty as to the competing rights of creditors and the non-bankrupt spouse. The amendments will also improve the ability of bankruptcy trustees to collect income contributions, and prevent the use of family law financial agreements as a means of avoiding payment to creditors.

The amendments have been developed following the Joint Taskforce Report on the Use of Bankruptcy and Family Law Schemes to Avoid Payment of Tax. The Taskforce consisted of officers from the Attorney-General's Department, Insolvency and Trustee Service Australia, the Australian Taxation Office and Treasury.

Interaction between family law and bankruptcy

There are a number of difficulties which can arise when bankruptcy and family law issues and/or proceedings exist at the same time. There are inconsistencies between family law and bankruptcy law which create uncertainty for all involved and can cause hardship for either or both creditors and non-bankrupt spouses.

From a bankruptcy perspective, trustees can find themselves in an uncertain position when having to resolve or reconcile competing claims. Creditors unaware of the potential property interest of a non-bankrupt spouse also suffer from a lack of certainty.

From a family law perspective, the legal ownership of property does not always reflect the non-financial contribution of the parties to the marriage. The special interest of the non-bankrupt spouse in the marital property created through both financial and non-financial contributions, which may be recognised by the Family Court in exercising its discretion to alter property interests, is not expressly recognised under the Bankruptcy Act.

Different outcomes result depending upon the order in which events occur (those events including separation, bankruptcy and distribution of property by the trustee in bankruptcy).

The amendments proposed in this Bill will address these issues by clarifying the rights of the bankruptcy trustee and the non-bankrupt spouse. Generally, the amendments will enable concurrent bankruptcy and family law proceedings to be brought together to ensure all the issues are dealt with at the same time.

Collection of income contributions

Where a bankrupt is employed and has been assessed as liable to pay contributions from his or her income, the Official Receiver can issue a notice to the employer garnisheeing the bankrupt's wages to collect the amount assessed. The Official Receiver can also issue a garnishee notice to a bank or other financial institution to collect contributions.

Some bankrupts (including some high-income professionals) are not 'employed' as such and do not operate bank accounts in their own names. The existing contribution collection scheme is not effective in these cases, where the bankrupt chooses not to comply.

These deficiencies will be addressed by the supervised account regime to be introduced by this Bill. The amendments will allow the trustee to have access to all of the bankrupt's income before it reaches the bankrupt. This will enable the trustee to use the existing methods for collecting income contributions by ensuring that the bankrupt operates a bank account (into which all income must be deposited) under the trustee's supervision.

Family law financial agreements

The Bill also proposes amendments to ensure that financial agreements under Part VIIIA of the Family Law Act cannot be used to defeat the claims of creditors. One amendment will exclude financial agreements from the definition of 'maintenance agreement' in the Bankruptcy Act to ensure that trustees can use the 'clawback' provisions of that Act to recover property transferred prior to bankruptcy under such an agreement. A further amendment will introduce a new act of bankruptcy which will occur when a person is rendered insolvent as a result of assets being transferred under a financial agreement. This will mean that the person's bankruptcy will be taken to have commenced at the time of that transfer which will extend the 'relation back' period. This will allow the trustee to claim property transferred under the agreement as divisible property in the bankrupt's estate.

Other amendments to the Family Law Act in Schedule 5 to the Bill will require a separation declaration to be made in relation to binding financial agreements that deal with post-separation financial arrangements, before those aspects of the agreement come into effect.