Re John Milton Miller Ex Parte: the Official Trustee [1989] FCA 40 (2 March 1989)

FEDERAL COURT OF AUSTRALIA

Re: JOHN MILTON MILLER
Ex Parte: THE OFFICIAL TRUSTEE
No. 767 of 1986
FED No. 46
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
Fisher J.(1)

CATCHWORDS

Bankruptcy - income of bankrupt - Court's discretion to order payment to trustee - Bankrupt a beneficiary under discretionary trust - Bankrupt's employer making substantial contribution to superannuation fund for bankrupt's benefit - Availability of forfeited benefits under superannuation scheme to relieve hardship on bankrupt and bankrupt's family - Income of bankrupt's wife.

Bankruptcy Act 1966 (Cth) s.131

HEARING

ADELAIDE
2:3:1989

Solicitor for the Applicant: Mr. A. Besanko

Australian Government Solicitor

Solicitor for the Bankrupt: Mr. I. Martirous
Martirous, Kadis & Metanomski

ORDER

The bankrupt John Milton Miller pay to the applicant The Official Trustee for the benefit of the bankrupt's creditors the sum of $500 each week.

The parties have liberty to apply on the question of costs and as to the date from which payments begin.

Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

DECISION

Dr. Miller became bankrupt upon presentation of his own petition on 2 September 1986 and the applicant, the Official Trustee, is the trustee of his bankrupt estate. His assets as listed at that time in his statement of affairs totalled only $2,342.00. Of the five unsecured creditors who lodged proofs of debts totalling $328,652, the major creditor was the Deputy Commissioner of Taxation for an amount of $325,738. That amount relates to income tax assessments for the period 30 June 1978 to 30 June 1985.

2. From September 1986 to 1 December 1988, Dr. Miller paid $25 per week to the Official Trustee to be applied for the benefit of the creditors. Since 1 December 1988 that amount has been $300 per week, pursuant to an order made on 30 October 1988 under sub.s 131(2) of the Bankruptcy Act 1966. This present application seeks to increase the weekly payment by Dr. Miller to $1,000 or such other sum as the Court deems fit.

3. Section 131 provides -

"131(1) Subject to this section, a bankrupt who is in
receipt of income is entitled to retain it for
his own benefit.
131(2) The Court may, upon the application of the
Trustee, order that all, or such part as the
Court thinks fit, of the income of the
bankrupt shall be paid to the trustee for the
benefit of the bankrupt's creditors."

4. As a starting point, it is necessary to isolate the matters which are relevant considerations for the Court in exercising the broadly expressed power in sub.s 131(2). Foremost is the bankrupt's current income. This requires investigation not only of what might loosely be called the bankrupt's actual income, in terms of salary, superannuation contribution by employers, fringe benefits and so on, but also potential income entitlements, such as those arising under a discretionary trust. (Re Wald ex parte Lyford, unreported 19 March 1986, Toohey J.). Payments under sub.s 131(2) are of course made from the bankrupt's after-tax income, so the level of taxation of the bankrupt's income must be relevant. In Lyford v Levit (1984) 2 FCR 264 at p 270 the Full Court said:

"The decision is one of ascertaining what is reasonably
necessary for the maintenance of the bankrupt and his
family, regard being had to the bankrupt's occupation
and station in life;... In making that assessment, the
Court may bring into account not only the income in the
hands of the bankrupt but also income in other funds
which are reasonably available to him."

5. It follows that any income of the bankrupt's wife and children must be taken into account as well as the entitlement of any of them under discretionary trusts.

6. It might be assumed that the proper amount for the Court to order the bankrupt to pay the Trustee would be the difference between the bankrupt's after-tax income and his reasonable expenses (including those of his family). The Act does not however refer to such a mathematical approach; the matter is as the Court "thinks fit" (sub.s 131(2)). This is in part perhaps recognition that precise determination of income and expenses may be difficult. However attempting such determination is the logical basis on which the Court should proceed.

7. Dr. Miller is an obstetrician and gynaecologist, and it is from this work that he receives the major part of his income. He is employed by the medical practice company Drs. Miller & Rollond Pty. Ltd. the income of which company comprises the fees earned on its behalf by Dr. Miller and Dr. Rollond. The principal operating expenses of the company comprise assistants' fees, fees paid to a service company, payments on account of superannuation and salaries. Both Dr. Miller and Dr. Rollond receive a salary, paid or credited monthly, the amount due to each being calculated by reference to the proportion of the fees earned by him. From this monthly salary the company makes deductions for income tax and certain personal expenses, with the balance being available for distribution. Dr. Miller also earns additional salary from the Flinders Medical Centre, which body makes payments to a superannuation fund on his behalf. He receives a nominal salary from the service company.

8. The financial statements tendered in this matter vary slightly as to the precise amounts derived from these sources of income and the amounts paid by his employers on his behalf to superannuation funds. During the financial year ended 30 June 1988 the medical practice company paid $64,653 on his account to a superannuation fund and his salary from that company amounted to $130,185, from which income tax and personal expenses referable to his professional practice must be deducted to arrive at his disposable income. He also received $35,291 from Flinders Medical Centre, some portion of which was applied towards his superannuation. During that financial year income tax totalling $55,413 was paid by the medical practice company on his account.

9. Dr. Miller gave evidence that the amount paid for him by the medical practice company as superannuation was the maximum amount allowable within the guidelines of the Commissioner of Taxation for such superannuation contributions by employers. Paid as superannuation, that amount was not assessable to income tax, either to the company or in his hands, nor did it form part of Dr. Miller's disposable income. However it appears that Dr. Miller could, if he so chose, request that the medical practice company make no or alternatively lesser superannuation payments, and instead pay him a larger amount as salary. The extra $65,000 (or whatever the superannuation payment would otherwise have been), less income tax, would thus become available to Dr. Miller as disposable income. Whether or not Dr. Miller should so arrange his affairs is a matter for him and depends on his assessment of the manner in which he makes reasonable provision for himself and family and for his retirement. However this extremely large payment by the medical practice company must be taken into account in assessing the amount the Court should direct him to pay in accordance with sub.s 131(2).

10. In addition to paying salaries and making contributions to superannuation funds the medical practice company paid $228,869 by way of service fees in the year ending 30 June 1988 to Miller & Rollond Nominees Pty. Ltd. That company as trustee of the Miller & Rollond Unit Trust provided administrative services to the Medical Practice Company and its employees. It made a profit in that year of $37,926, after payment of salaries and expenses, which was divisible between the beneficiaries of the Miller and the Rollond Family Trusts. Dr. Miller was paid a salary of $2,248 by the Company and his wife received $13,967 that year.

11. As to potential sources of income, Dr. Miller is a beneficiary under the John M. Miller Family Settlement ("the family trust"), of which Dr. Rollond is sole trustee. The trustee of the family trust currently receives income from two sources; from the Miller & Rollond Unit Trust, and from the Greenhill Chambers Unit Trust which leases (inter alia) the medical premises to the service company. In the financial year 1987/88, the net income of the family trust from these two sources was $19,693, and was divided between the beneficiaries as follows:-

Dr. Miller -
Vivienne Lyle Miller (Wife) $17,861
Amanda Miller (Daughter) $ 1,000
Natanya Andonas (Step child)$ 416
Sascha Andonas (Step child) $ 416

12. The trust had in hand on 30 June 1988 an amount of $7,978 in undistributed income carried forward from the previous year.

13. In one sense all the family trust's income is potential income for Dr. Miller, as the trustees could in their discretion decide to pay nothing to the other beneficiaries and everything to him. Alternatively to the extent to which distributions are made to other beneficiaries he is to that extent relieved of his obligation to provide for them. This is particularly so as the other beneficiaries are in any case still within Dr. Miller's dependant family. Of course the beneficiaries other than Dr. Miller may pay less, or in some cases no, income tax on the trust distributions they receive (whereas Dr. Miller would pay the rate). That means that more of the trust income is available within the family as disposable income.

14. Tax advantage aside, my conclusion is that whether Dr. Miller receives the entire trust distribution, or whether it goes in whole or part to the other beneficiaries (i.e. to be applied towards their expenses) does not much matter. In ascertaining Dr. Miller's disposable income minus reasonable expenses for himself and family, the two methods of distribution are really different sides of the same coin.

15. Dr. Miller gave evidence that his salary income from his work as a specialist was liable to fluctuation; effectively self-employed, he can control the amount he works and accordingly his income. Dr. Miller stated that the reason he was working such long hours at present was to enable substantial sums to be put away for superannnuation, to provide for his retirement. As he said, his only major asset at present is his earning capacity. Furthermore, Dr. Miller stated that his potential employment as an obstetrician and gynaecologist would significantly decrease beyond the age of 60. Dr. Miller is almost 57 years of age.

16. The answer to both these issues of fluctuating income is I think to assume that Dr. Miller's income from all sources will remain reasonably constant for the remaining years of his bankruptcy, and to make an order under sub.s 131(2) on that basis. If Dr. Miller suffers a significant drop in income during that time, then he may apply to the court to vary my order under sub.s 131(2).

17. In the ordinary course I would now turn to the second stage of the sub.s 131(2) calculation, namely the calculation of Dr. Miller's expenses. Some of these expenses are related to his work. For example, in 1987/88 Locum and Assistants fees totalled $20,194 and other business expenses including motor vehicle expenses and subscriptions totalled $17,442.

18. The next step would normally be to determine what sum represents that part of the reasonable expenses of Dr. Miller and his family which Dr. Miller should provide. However in this matter it is not necessary to undertake this exercise. The Official Trustee has conceded that Dr. Miller's expenses for himself and his family are reasonable. Generally it can be said that he is presently applying the whole of what I have called his disposable income in maintenance of himself and his family and in paying the weekly amount of $300 ordered by the Court.

19. Counsel for the Official Trustee agreed that the two major items for consideration in this application are the extent of Mrs. Miller's own income, and Dr. Miller's provision for superannuation. I will consider superannuation first. As I noted above, the very substantial amount of $65,000 yearly superannuation contribution is made by the medical practice company, on his behalf and with his approval. Thus that sum could be reduced and an additional amount paid to him as salary if he so directed. In other words, Dr. Miller can if the necessity arises increase his disposable income by reducing the amount paid on his behalf as contributions to a superannuation fund. The consequent increase in salary will be subject to income tax in his hands. I agree with the view of Toohey J. in Re Wald that it is reasonable for a person in the position of Dr. Miller to make provision by way of superannuation for retirement. He held that the annual contributions of $13,929.10 and the accumulated benefits of $70,000 were in the case of Dr. Wald in no way unreasonable. However in the present matter the annual contributions are in the vicinity of $65,000 and the accumulated benefits at this date amount to $243,000. Furthermore there are additional benefits accruing under the superannuation fund conducted by the Flinders Medical Centre.

20. One approach would be to say that such expense is not allowable at all in terms of making reasonable provision for the Miller family. The Miller family's standard of living will not be compromised in the next two years if Dr. Miller does not have such a sum contributed to the superannuation funds. Indeed, if anything, the family's position will be better, as Dr. Miller's salary will correspondingly increase (less income tax). Even if he makes no contributions for the next two years and even if his earning capacity decreases significantly from the age of 60, Dr. Miller will retire with significant superannuation. If until his discharge from bankruptcy he arranges that his employer set aside only one half of the sum presently contributed to the superannuation fund, his salary would increase by more than $30,000 and his disposable income by some $15,000 after tax. However this is a matter for Dr. Miller and his advisors.

21. In addition, it is necessary to consider the terms of the superannuation trust deed as providing a potential source of funds which could if necessary provide for the maintenance of Dr. Miller and his family. Clause 18.1 & 18.3 of that Deed state:

"18.1 Bankruptcy etc.
The benefits being provided under the plan in respect
of a Member shall be absolutely forfeited if he becomes
bankrupt or insolvent...
18.3 Application of Benefits
The Trustees may in their absolute discretion pay or
apply the whole or any part of the benefits which have
been forfeited or suspended under this Clause 18 to or
for the benefit of the Member or any one or more of his
Dependants in such shares and proportions and in such
manner as the Trustees in their absolute discretion
determine PROVIDED HOWEVER that while the Member is
still in the Service of his Employer, the Trustees
shall not make any payment under this sub-clause,
except for the maintenance or support of the Member or
his Dependants and for the purpose of relieving
hardship."

22. In answer to an enquiry from the Official Trustee the trustees of the superannnuation fund conceded that Dr. Miller's accrued benefits have been forfeited and thus are available for application in accordance with the provisions of clause 18.3.

23. Two matters arise from these provisions. First, the trustees are presently entitled to make payments to relieve any hardship on the part of Dr. Miller or his dependants. Second if Dr. Miller were to retire during the currency of his bankruptcy, the trustees could, if they so chose, pay all Dr. Miller's accrued benefits to him or his dependants.

24. In my opinion the income of the family trust and the funds which represent the forfeited benefits of Dr. Miller must, together with the very substantial contributions made by the medical practice company be taken into account in assessing what is available for his maintenance and that of his family and what the Court should direct him to pay to the Official Trustee.

25. It is also necessary to asses the financial circumstances of his wife. I agree with the approach of Toohey J. in Re Wald that in determining what is reasonably necessary for the maintenance of the bankrupt and his family the Court cannot ignore the income of his spouse. I also refer to Re McLachlan (1975) 8 ALR 162 at p 169. This is particularly the case when such income is mainly available to her in consequence of tax saving arrangements made by the bankrupt.

26. In the year ending 30 June 1987 Mrs. Miller was in receipt of a salary of $13,967 paid by Miller and Rollond Nominees Pty. Ltd. and received $23,996 from the John M. Miller Family Trust. In addition she was in receipt of interest on accounts with the Hindmarsh Building Society and various banks totalling $1,385. Her assessable income amounted to $38,776 and she claimed deductions of $134. Mrs. Miller said that she had approximately $30,000 in her account with the Hindmarsh Building Society, to which account she was in the habit of paying the amount she received as a beneficiary of the John M. Miller Family Trust. She owns the dwellinghouse in which she and her husband reside and makes payments of the interest due under a mortgage thereon amounting to $6,000 per annum. However most of the other household expenses were in the past year paid by her husband and she only makes a relatively small contribution to the family expenses.

27. In my opinion Mrs. Miller is able to make a more substantial contribution towards the maintenance of Dr. Miller and the family. I can not order her to do so but take into account her concession that after payment of income tax, repayments under the mortgage and $50 to $100 per week in supplementing the housekeeping funds she has an income in excess of $300 per week.

28. In a matter such as this when substantial sums of money are involved, it is difficult to be precise. It might be said that such precision is not so necessary when there are funds potentially available to relieve any hardship consequent upon the orders which the Court makes or any adverse contingencies not presently perceived. In my opinion an appropriate order is that Dr. Miller pay to the Official Trustee the sum of $500 per week. It is not for me to order how Dr. Miller or his wife should adjust their financial circumstances to meet this increased amount. In my opinion however appropriate adjustments can be made in respect of the contributions paid by the medical practice company in respect of Dr. Miller's superannuation and Mrs. Miller can make a more substantial contribution to the maintenance of the family.

29. I will hear counsel on the question of costs and the date from which the increased payments should commence.