PCI knows bankruptcy – october 2019
Oct 15 2019
Thrifty Bankrupts Get Punished.
In the August edition of this newsletter, I highlighted an anomaly arising in the operation of the Bankruptcy Act in concert with taxation legislation that made bankrupts liable for postbankruptcy capital gains tax. In this edition I review another outrageous circumstance whereby a bankrupt can be found guilty of an offence by being financially prudent and investing the proceeds of their income even after making full payment of their bankruptcy income contributions.
This was the case in the matter of Rodway v White in which the Bankrupt purchased shares from the proceeds of his income and subsequently the trustee claimed these shares as after-acquired property. Let’s examine the law and the facts of this case.
The Law
Firstly section 58 of the Bankruptcy Act provides that the property of the bankrupt, not being after-acquired property vests forthwith in the Trustee. Subsection b) provides that the after-acquired property vests as soon as it is acquired by or devolves on the bankrupt.
Section 116 sets out certain property which is exempt, known as non-divisible property which includes items such as household furniture and effects, motor vehicles and tools of trade (subject to limits), as well as interests in life insurance policies and superannuation. (See Section 116 for a complete listing of items.)
Lastly, Section 139 J and the subsequent provisions of Division 4B deal with the obligation of a bankrupt who derives income during the bankruptcy to pay contributions towards the bankrupt estate. This amount is calculated by reference to a formula taking into account a minimum threshold which increases based on the number of dependents.
So, in summary a bankrupt is entitled to keep those assets defined as non-divisible property but otherwise loses any property held as at the date of bankruptcy as well as any property acquired during the course of the bankruptcy. And the income of the bankrupt is not property, or is it?
The Cases
In the matter of Rodway the Bankrupt earned more than $150k over a two-year period and paid the relevant income contributions on such income. From the income he was entitled to keep the bankrupt purchased shares and was subsequently charged and convicted on 21 offences under Section265(1)(a) of the Bankruptcy Act for failing to disclose an interest in property to his Trustee.
In an attempt to present an argument as to the unfairness of it all Mr Rodway and his team turned to Section 116 and claimed that the balance of his income after payment of income contributions was not divisible property.
It was a logical argument but unfortunately no such provision was contained in section 116 and as a result, Justice Heenan in the appeal case heard in the Supreme Court of Western Australia, found that the shares did in fact constitute property within the meaning of the Bankruptcy Act and such property was divisible amongst creditors of the bankrupt.
Unfortunately for Mr Rodway, not only did he lose the shares that he diligently acquired out of his post contribution income, he was also fined $5,700 and ordered to pay costs of $4,000.
A similar circumstance played out in the matter of Di Cioccio v Official Trustee in Bankruptcy firstly in the Federal Court and then on appeal to the Full Federal Court in 2015.
Mr Di Cioccio had been able to save some monies from his income which was below the threshold and acquired some shares with the intention of eventually purchasing a motor vehicle. The shares were lost to the Trustee as after-acquired property.
Mr Di Cioccio sensibly argued that there was an anomaly between Sections 58 and 116 as concerned property, and Division 4B as concerned income contributions, pointing out that monies in a bank account would also be after acquired property and therefore available to the Trustee which would completely defeat the purpose of Division 4B.
The Court found otherwise on the basis that Section 134 would operate to provide the Trustee with the discretion to allow the bankrupt to retain those monies. Unfortunately, the Bankrupts’ dream of eventual motor vehicle ownership (under the threshold of course) was lost.
The Problem
Certainly, those scenarios seem incredibly harsh and made all the more difficult to swallow when you look at the many other things that the bankrupts could have done with these funds that would not have attracted the attention of their Trustees. Mr Rodway could have used those funds to go on a shopping spree, play the pokies, or take a holiday (locally of course) and Mr Di Cioccio could.
have purchased a motor vehicle directly. Neither of which would have caused them any problems. However, by choosing to be financially prudent and make provision for their future by buying shares they both became liable to forfeit those funds.
The Fix
Certainly, this situation is absurd and needs to be resolved, but this initially occurred in 2009 and nothing has been done. And it’s not one of those circumstances where a fix is too complex to contemplate. Mr Di Cioccio was right to point out the anomaly and Mr Rodways’ advisers were on the right track in considering Section 116 as an appropriate solution.
In its current form however, that section makes no mention of post contribution income being protected. However, it easily could.
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