Bankruptcy & the Age Pension – Not all what it seems!

As Bankruptcy Trustees, we are often asked to assist individuals of many and varied ages on personal insolvency options available to them. Individuals generally have differing financial circumstances and the advice provided needs to be considered on a case by case basis.
With Australia’s ageing population, we have received enquiries (and anticipate in the future the potential for an increase) regarding treatment of benefits and payments made under the Social Security Act 1991 (“SSA”) and other social security legislation in the context of the income contribution regime when the individual has to consider voluntary bankruptcy.

We have recently had a professional advisor who was seeking clarification as to whether receipt of a payment under the Pension Bonus Scheme would be able to be retained by their client in bankruptcy or whether it would form part of property available to a Bankruptcy Trustee. Whilst this Scheme is now closed (see below) it does serve as a timely reminder that there are many important considerations to be given when social security legislation is involved and it can be quite tricky – so it is important to get the right professional advice.

  • The Pension Bonus Scheme

In 1998, the Federal Government passed the Social Security and Veterans’ Affairs Legislation Amendment (Pension Bonus Scheme) Act (“PBSA”). The legislation was designed to encourage older Australian who were eligible for the aged pension to remain in the workforce. As a reward for deferring their claim for the aged pension (and meeting various other conditions), they were entitled to a single, tax-free lump-sum pension bonus.

While registration for the Pension Bonus Scheme is now been closed, we were asked to consider whether such payment (if received) under the Pension Bonus Scheme to an individual after bankruptcy would be divisible or after-acquired property, or income when received.

  • Property Divisible among Creditors

Section 58 and Division 3, Subdivision A of the Bankruptcy Act (“the Act”) sets out property of a bankrupt that vests with a Bankruptcy Trustee and divisible among creditors. After-acquired property is taken to include all property that has been acquired by the Bankrupt after the commencement of Bankruptcy and before discharge. Property is given a wide definition under Section 5 of the Act to include personal property of every description.

Prima facie, in a situation where the pension bonus was received prior to bankruptcy and held in a bank account maintained by the bankrupt, it is likely that this sum would be divisible property. If the pension bonus was received after bankruptcy, a Trustee needs to consider the interaction of Division 3A of the Act with the income contribution regime contained in Subdivision 4C.

While Sections 58 and 116 of the Act were broad enough to encompass after-acquired income as property, such income is taken not to vest with the Trustee as it dealt with under the income contribution regime (Re Gillies [1993] FCA 289). Recent case law has clarified and not changed this position (Di Cioccio v Official Trustee in Bankruptcy (as Trustee of the Bankrupt Estate of Di Cioccio) [2015] FCAFC 30).

  • Specific exemptions

Section 11(3C) of the SSA specifically exempts an individual’s entitlement to the pension bonus to be an asset of the person for the purposes of the SSA. The Schedule 1 of the PBSA states that “a pension bonus is absolutely inalienable, whether by way of, or in consequence of, sale, assignment, charge, execution, bankruptcy or otherwise”. Based on this legislation, it would appear that a person’s entitlement and receipt of a pension bonus would not be divisible property under the Act.

  • The meaning of Income

Section 139L(1) of the Act states that income of a bankrupt has its ordinary meaning which is derived from the Income Tax Assessment Act 1997 to encompass income that comes under the ordinary meaning of the word “income”. The Act and Bankruptcy Regulations also vary the definition of income to include and exclude various payments made to a bankrupt. Notably, Bankruptcy Regulation 6.12(1) exempts certain amounts as income if it is classified as not being income under Section 8(8) of the Social Security Act 1991 (with some exceptions). The pension bonus is a payment under Section 92 of the Social Security Act 1991 and when applying Bankruptcy Regulation 6.12(1) does not fall under the category of an exception to the definition of income.Taxation implications

  • Taxation implications

Lump sum pension bonuses paid under SSA are tax-free and therefore no amounts can be deducted under Section 139N(1) of the Act when performing an income assessment.


Accordingly, in this particular situation, if the whole amount of the pension bonus was paid to the individual after the bankruptcy commenced, we believe it would be classified as income for the purposes of the Act.

This case highlights the need for Bankruptcy Trustees to be cognisant of the interaction of the Bankruptcy Act with other legislation and additionally that professional advisors and individuals understand the implications of the legislation on their specific circumstances.

Crowd Source Funding for Retail Investors. Good idea or the potential for them to be the new Ponzi scheme?

The Corporations Amendment (Crowd Source Funding) Bill 2016 is due to come into operation on 29 September 2017. Crowd Source Funding (“CSF”) continues to be a popular way that allows entrepreneurs/start-ups to raise funds from many investors. Until recently CSF in Australia has been aimed at “sophisticated” or “wholesale” investors. The above Bill effectively establishes a regulatory framework to facilitate CSF by small, unlisted public companies aimed at attracting retail investors.
There is no doubt that new funding models such as CSF which enable new ideas to get off the ground and fly and contribute to productivity growth are a good thing. However, I do see the potential for misuse and some comparisons to Ponzi schemes come to mind. What is a Ponzi scheme? Wikipedia describes this type of scheme as one where “the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading”. The analogy here is that the concept/assumptions around the business are overstated and/or further capital raisings being based on the potential for the product/service being overplayed.

Retail investors should apply the same scepticism, fundamental analysis and industry research they do to a company listed on a stock exchange before deciding whether to invest via the CSF platform. This also applies to other platforms such as kickstarter and others.

The fact that CSF is (or will be) typically done online and facilitates a large number of individual (or retail) investors to make small (but still important) financial contributions highlights the potential for mis-use. Retail investors need to absolutely accept that investing in start-ups or small businesses present high risks of financial loss. ASIC insolvency statistics confirm that the overwhelming number of corporate insolvencies are micro to small medium enterprises. As a Registered Liquidator, I see this frequently.

Whilst the regulatory framework in this Bill has been designed to balance the barriers for business seeking CSF with an adequate level of protection against risk and fraud for retail investors, only time will tell whether some CSF companies seek to take unfair advantage of this new form of funding. Some of the key requirements for those making a CSF offer are:

  • The offer must be for the issues of securities in the company making the offer [ie. can only be an unlisted public company limited by shares];
  • The company making the offer must be an “eligible CSF” company and its principal place of business must be in Australia;
  • The securities must satisfy the eligibility conditions [ie. a CSF company’s substantial purpose can’t be investing and it must have gross assets and turnover of < $25million respectively];
  • The offer must comply with the “issuer cap”. [ie. CSF companies can only seek to raise $5million in any 12 month period];
  • The company must not intend to use the funds obtained under the offer by it or a related company to invest in securities or interests in other entities or managed investment schemes.

Relevantly the CSF offer generally will not need to be as detailed as a prospectus and other disclosure documents.

All CSF offers will need to be made via the platform of a CSF intermediary and such intermediary will be required to hold an AFSL – thus there are some in-built protections to the retail investor, but dangers still lay in the quality of the offer and the individuals standing behind it.

The maximum cap per retail investor is $10,000 in any 12 month period and there is a 48 hour cooling-off period. Retail investors should ensure they do their due diligence if they may be seeking to invest via such platforms and try to make an objective assessment of the investment risk versus return scenario. And importantly remember, the bigger the return, the bigger the risk.

by Bruce Gleeson

Phoenix Activity – Exposing Fraudulent Directors

Whilst it is difficult to accurately determine the true cost of “phoenix activity” primarily due to a lack of relevant data, it has been estimated to cost the Australian economy in the vicinity of $3.2 billion per annum. (1)

What is phoenix activity? It essentially involves one company taking over the business of another company that is liquidated where the controllers of both companies are the same people or their associates. It is important to profile and understand phoenix activity to really understand how it needs to be deterred. In my opinion it is the illegal or “harmful phoenix activity” which has the most profound impact on the economy. Indeed in the recent case of Plutus Payroll which appears to have involved harmful phoenix activity, it is estimated that the loss to Government Departments (mainly the ATO) could be as high as $165 million.

Harmful phoenix activity left unchecked is not only anti-competitive, but also undermines Australia’s revenue base.

What is required to deter harmful phoenix activity? Whilst the list below is not exhaustive, it seeks to cover certain keys areas:

1. There needs to be an enhanced information system to detect and measure phoenix activity. To this end, there needs to be an overhaul of the current collection/reporting system by Registered Liquidators to ASIC. Better data capture will enable improved statistics/measurement of the true extent of the issue and also enable certain industries/individuals to be focussed on.

2. There also needs to be more effective sharing of information between State and Federal Regulators, as well as enhancing information sharing with allies such as credit reporting agencies and trade bodies.

3. Establish via ASIC a free online search acility that has a register of disqualified directors and associated companies.

4. Perhaps most importantly, the process to incorporate a company and become a director needs to be tightened.
• Presently it is easier to become a director of a company than it is to open a bank account. This has to change.

• Also, the registration of an Australian company only requires the name, address, and date of birth of each proposed officer. ASIC forms do not presently require or ask for prior corporate history of proposed directors and no supporting evidence is required about their identity.

Recent indications from Federal Government are that it may not be too long before a Director Identification Number (“DIN”) is introduced. This should be introduced without delay and require all directors to undergo a 100 point ID check to get a DIN. It should also be an online application. Whilst the DIN is not the complete panacea to counter “harmful phoenix activity”, it is a long overdue step in the right direction when done with points 1-3 above.

Importantly such changes will not mean that directors of a company should fear seeking professional advice as early as possible when they are in financial difficulty. Rather, the above is really focusing on the serious financial impact that “harmful phoenix activity” has on an economy.

(1) based on a 2012 PWC report.

by Bruce Gleeson

Bankruptcy and Family Trusts – Are They Still Effective?

Family Trusts have and will continue to be used into the future for a variety of purposes, in particular asset protection. Most Family Trusts notably have a Corporate Trustee. As a Registered Bankruptcy Trustee, I am quite often asked by individuals who may be a Director/Shareholder of the Corporate Trustee and/or a Beneficiary of the Family Trust (or discretionary trust) what happens if the individual goes into bankruptcy (either voluntary [themselves] or involuntarily [via the Federal Court])?
Ultimately it will significantly depend on the specific circumstances of each case and indeed the Trust Deed, but the Courts have for some time considered and will continue to exercise their minds about the extent to which Family Trusts may be impacted by the bankruptcy of a Director/Shareholder/Appointor or Beneficiary. This article examines a recent case which re-affirms that Family Trusts continue to be problematic for Bankruptcy Trustees to attack.

The case is Fordyce v Ryan & Anor; Fordyce v Quinn & Anor [2016] QSC 307 and judgement was delivered on 20 December 2016. The key facts can be summarised as follows:

• The Bankrupt was the sole Director and Shareholder of the Corporate Trustee company of the Fairdinks Discretionary Trust (“FDT”) and also the Corporate Trustee companies of Unit Trusts.

• FDT held all the units in one of the Unit Trusts and two-thirds of the units in the second Unit Trust. The major asset of both Unit Trusts was real estate.

• The Mortgagee of both Unit Trusts sold the real estate with the consequent effect that there were surplus funds available. The surplus proceeds were in excess of $200,000 in each Unit Trust.

• The Corporate Trustee for both Unit Trusts was deregistered and as such, the above surplus funds vested with ASIC – and ASIC effectively stepped into the shoes of the Corporate Trustee and either may have acted as Trustee or applied to the Court for the appointment of a new Trustee.

• FDT was as the name suggests a discretionary trust and had two (2) classes of beneficiaries. The Bankrupt was in the 2nd class of beneficiaries – being a general beneficiary.

PRIOR to his bankruptcy, the Bankrupt who was CONTROLLING each of the Corporate Trustee companies of the Unit Trusts made distributions to the FDT and then in turn to him as a beneficiary of the Family Trust. The evidence for this was income tax returns of the various trusts.

• On 2 September 2015 the Bankrupt (Mr Michael Quinn) entered into bankruptcy and the Bankruptcy Trustee sought to recover the Bankrupt’s interest in the surplus assets of the Unit Trusts by applying to the Court to appoint Receivers so that the Unit Trusts could be wound up.

• The Bankruptcy Trustee submitted that  the Bankrupt controlled the FDT and relied on the decision of the Federal Court in ASIC v Carey (No 6) (2006) 153 FCR 509 (“Richstar”) to argue that the Bankrupt’s interest amounted to property that had vested under Section 58 of the Bankruptcy Act. The Bankruptcy Trustee was also seeking to have Receivers appointed to the Unit Trusts as part of the application.

• Relevantly the Court determined that the FDT was purely a “discretionary trust” and therefore the beneficiary is not someone who has a property interest in the trust property. In doing so it stated that the “critical question is whether effective control of a Trustee’s power of selection can transform the interest of a beneficiary of a discretionary trust into property of the bankrupt”. In addition, the Court also commented “a trust once validly constituted does not change in nature because the Trustee and some of the beneficiaries subsequently choose no longer to abide by the obligations of the trust relationship”.

• The Court found that the Bankrupt’s right as one of the general beneficiaries of the FDT did not vest in the Bankruptcy Trustee as property of the Bankrupt per Section 58. The Court also dismissed the application insofar as appointment of the Receivers to the Unit Trusts were concerned.

This case shows how difficult it can be for Bankruptcy Trustee’s to successfully attack Family Trusts. Whilst the outcome will invariably come down to the specific facts of each circumstance, Family Trusts at least at this point appear to be the kryptonite equivalent to defeat bankruptcy trustee claims. However, I think it should be expected that this area will continue to be pressed where it is believed there may be a potential recovery for creditors.

Bruce Gleeson

Attitude & Corporate Insolvency Profiles 2016

One of my favourite Winston Churchill’s quotes is so relevant to directors and owners in Micro, Small and Medium Enterprises (“MSME”). That is: “attitude is a little thing that makes a big difference”.
In December 2016, ASIC released its annual overview of corporate insolvencies based on statutory reports lodged by external administrators (i.e. predominantly voluntary administrators and liquidators) for the 2016 financial year (see ASIC website 16-436MR).

Summarised in the table below are some key trends emerging from the collation of the data over the 2014, 2015 and 2016 financial years. Of particular note, is that MSME’s again dominate the corporate insolvency landscape.

Whilst it is acknowledged that this data may be somewhat subjective because it has been filed by the external administrator, the data has been collated over at least six (6) years and hence some of the trends are noteworthy and instructional for owners and advisors.

Typically in my experience as a Registered Liquidator, MSME’s are at a higher risk of failure not only in the early phases, but also at other pivotal periods. MSME’s quite often have a lack of key resources (particularly key people) and this can quite often become a major issue. Coupled with management not always having the “right attitude” the business can quickly be adversely impacted. Equally the opposite is true. It is not to say that management is not working hard, but it comes back to having the right strategy and attitude and executing on it.

MSME’s just like bigger companies must understand their key advantages and play to these, as well as continually re-evaluating and re-adjusting their business strategy as the business evolves. This is critical.

A key factor coming out of the ASIC release is that unpaid taxes account for approximately 65% of liabilities in the $250,000 or less category. This is not as surprising as some might think – but it does reveal a tendency for MSME’s to use the ATO as the lowest priority unsecured creditor. Remember directors can be personally liable for PAYG and SGC debts of companies in certain circumstances.

Relevantly in the 2016 MYEFO the Government announced its intention from 1 July 2017 to inform credit reporting agencies about the tax position of businesses that have not effectively engaged with the ATO where the debt is more than $10,000 and at least 90 days overdue. This aim is to encourage businesses to pay tax debts in a more timely manner. If this intention becomes reality, I expect that it will cause MSME’s difficulties if their tax affairs are not kept in good order.

So as we start 2017, I encourage directors and owners of MSME’s to review their business strategy with the right attitude and if things are not heading in the right direction to seek advice at the earliest possible time from a qualified and registered professional.

Jones Partners offers a complimentary free consultation if you would like to have a confidential discussion about your business.