by Martin Vu
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  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)  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.