Sweeney and Inspector-General in Bankruptcy [2000] AATA 109 (16 February 2000)

Last Updated: 11 May 2001

DECISION AND REASONS FOR DECISION [2000] AATA 109

ADMINISTRATIVE APPEALS TRIBUNAL )

) No Q99/572

GENERAL ADMINISTRATIVE DIVISION )

Re PAUL DESMOND SWEENEY

Applicant

And INSPECTOR-GENERAL IN BANKRUPTCY

Respondent

DECISION

Tribunal Senior Member WJF Purcell

Date 16 February 2000

Place Brisbane

Decision The Tribunal affirms the decision under review.

(Signed)

WJF PURCELL

(Senior Member)

CATCHWORDS

BANKRUPTCY - assessment of income contributions - whether employer superannuation payments 'income' - whether Medicare levy 'income' - superannuation contributions result from statutory scheme not from services performed and are not income - Medicare levy fits the definition of 'income tax' and is not 'income'

Bankruptcy Act 1966 ss.139, 185

Income Tax Assessment Act 1936 ss.6, 160, 251

Superannuation Guarantee (Administrator) Act 1992

Superannuation Industry (Supervision) Act 1993

Medicare Levy Act (1986) s.3, 5, 6

Social Security Act 1991

Thomas Robbins and Insolvency & Trustee Service Australia (AAT 13585, 24 December 1998)

REASONS FOR DECISION

16 February 2000 Senior Member WJF Purcell

1. This is an application for review of the decision of the Inspector-General in Bankruptcy (the Inspector-General) of 23 April 1999, in relation to income contribution assessments of Desmond Gerald Nolan (the bankrupt). Mr Sweeney is the trustee in bankruptcy of the bankrupt's estate (the trustee) and on 19 September 1997, pursuant to s.139 of the Bankruptcy Act 1966 (the Act) he levied assessments for income contributions payable by the bankrupt for the period 12 January 1996 to 11 January 1997 at $3,168.77, and for 12 January 1997 to 11 January 1998, at $4,134.83, a total of $7,303.60.

2. The Trustee's calculations were as follows:

"For the period from 12 January 1996 to 11 January 1997

Yearly income $32,836.00

Superannuation payments ($70.94 f/nx26) 1,844.44

Taxation refunds 692.00

Other income (interest) 50.00

Deemed total income 35,422.44

Tax paid on income 2,685.80

Total income for contributions assessment 32,736.64

Contribution threshold amount 26,399.10

Net contributable amount 6,337.54

Contribution for period 3,168.77

For the period from 12 January 1997 to 11 January 1998

Yearly income $32,604.00

Superannuation payments ($70.94 f/nx26) 1,956.76

Taxation refunds 2,872.00

Other income (interest and allowances) 174.00

Deemed total income 37,606.76

Tax paid on income 2,938.00

Total income for contributions assessment 34,668.76

Contribution threshold amount 26,399.10

Net contributable amount 8,269.66

Contribution for period 4,134.83"

3. On 18 February 1999 the bankrupt sought review of the trustee's income contribution assessments, and on 23 April 1999 the Inspector-General made the following assessments in their place:

"For the period 12 January 1996 to 11 January 1997

Gross Income $32,836.00

Taxation Refund 692.00

Interest 50.00

33,578.00

Less Income Tax 2,685.80

Medicare Levy 503.67

3,189.47

Net Income 30,388.53

Less AITA threshold amount (Nil dependants) 27,445.60

Income for contribution purposes 2,942.93

Divided by 2 (section 139S) $1,471.46

For the period 12 January 1997 to 11 January 1998

Gross Income $32,604.00

Other Income 174.00

32,778.00

Less Income Tax 2,938.00

Medicare Levy 491.67

3,429.67

Net Income 29,348.33

Less AITA threshold amount (Nil dependants) 27,445.60

Income for contribution purposes 1,902.73

Divided by 2 (section 139S) $951.36"

4. The Inspector-General excluded the compulsory superannuation contributions made by the bankrupt's employer, and the Medicare levy. The total of the contributions was thus reduced to $2,422.82. The trustee has applied to this Tribunal for review of the Inspector-General's decision.

5. The evidence before the Tribunal comprised the documents lodged pursuant to s.37 of the Administrative Appeals Tribunal Act 1975 (the T documents) and an exhibit tendered by the Inspector-General. Mr Rodgers appeared for the trustee and Ms Ford of counsel, represented the Inspector-General.

6. The issue between the parties was whether the mandatory contributions made by the bankrupt's employer, are "income" for the purposes of the Act. At the Hearing the trustee raised the additional question of whether the Medicare levy should be included as income, or treated as "income tax" for the purposes of the Act and excluded from the bankrupt's income. The parties had not prepared arguments on this aspect, and I accepted written submissions which were provided subsequently.

7. It is agreed between the parties that the contributions in issue are the mandatory contributions payable by an employer pursuant to the Superannuation Guarantee (Administrator) Act 1992, that the contributions are "preserved" until the bankrupt's retirement; he has no control over the contributions, nor can he access them prior to retirement; and finally that the contributions were made to the Health Employees Superannuation Trust Australia, which is a regulated superannuation fund within the meaning of the Superannuation Industry (Supervision) Act 1993.

8. The scheme for levying contributions to be made by a bankrupt to his or her estate is contained in Part VI Division 4B of the Act. The purpose of the division as outlined in s.139J of the Act, is to require a bankrupt who earns income during the bankruptcy, to pay contributions towards the bankrupt's estate, and to enable the recovery of certain money and property for the benefit of the bankrupt's estate.

9. "Income is defined in sub-ss.139K and 139L of the Act as follows:

"139K Definitions

In this Division, unless the contrary intention appears:

...

income, in relation to a bankrupt, has the meaning given by section 139L.

...

139L Meaning of income

In this Division:

income, in relation to a bankrupt, has its ordinary meaning, subject to the following qualifications:

(a) the following are income in relation to a bankrupt (whether or not they come within the ordinary meaning of "income"):

(i) an annuity or pension paid to the bankrupt from a provident, benefit, superannuation, retirement or approved deposit fund;

(ia) an annuity or pension paid to the bankrupt from an RSA;

(ii) a payment to the bankrupt in consequence of a termination of any office or employment;

(iii) an amount of annuity or pension received by the bankrupt under a policy of life insurance or endowment insurance;

(iv) an amount received by the bankrupt as a beneficiary under a trust to the extent that the amount was paid out of income of the trust;

(v) the value of a benefit that:

(A) is provided in any circumstances by any person (the provider) to the bankrupt; and

(B) is a benefit within the meaning of the Fringe Benefits Tax Assessment Act 1986 as in force at the beginning of 1 July 1992 (other than a benefit that would be an exempt benefit for the purposes of that Act if the provider were the employer of the bankrupt as an employee and the provider had provided the benefit in respect of the employment of the bankrupt);

being that value as worked out in accordance with the provisions of that Act but subject to any modifications of any provisions of that Act made by the regulations under this Act;

(vi) the value of a loan made to the bankrupt by an associated entity of the bankrupt, including:

(A) a loan under which the loan money is not paid to the bankrupt, but is paid or applied at the bankrupt's direction; and

(B) a loan that is not enforceable at law or in equity;

(vii) the amount of any money, or the value of any other consideration, received by a person other than the bankrupt from another person as a result of work done or services performed by the bankrupt, less any expenses (other than expenses of a capital nature) necessarily incurred by the first-mentioned person in connection with the work or services."

10. Sub-section 139M of the Act provides:

"139M Derivation of income

(1) Income is taken to be derived by a bankrupt for the purposes of this Division even though it is not actually received by the bankrupt because:

(a) an amount is deducted from it, or it is wholly or partly otherwise applied, under a law of the Commonwealth, of a State or of a Territory; or

(b) it is reinvested, accumulated or capitalised; or

(c) it is dealt with on behalf of the bankrupt or as the bankrupt directs."

11. The liability of the bankrupt to make income contributions is imposed by s.139P of the Act which provides:

"139P Liability of bankrupt to pay contribution

(1) Subject to section 139Q, if the income that a bankrupt is likely to derive during a contribution assessment period as assessed by the trustee under an original assessment exceeds the actual income threshold amount applicable in relation to the bankrupt when that assessment is made, the bankrupt is liable to pay to the trustee a contribution in respect of that period.

(2) Subject to section 139Q, if the income that a bankrupt is likely to derive during a contribution assessment period as assessed by the trustee under an original assessment does not exceed the actual income threshold amount applicable in relation to the bankrupt when that assessment is made, the bankrupt is not liable to, but may if he or she so wishes, pay to the trustee a contribution in respect of that period."

12. The applicant submits that the mandatory employer superannuation contribution satisfies all four elements of the extended definition of income under s.139L(a)(vii) of the Act.

* Firstly there must be an amount of money or other consideration - this is established in this case.

* Secondly, the money must be received by a person other than the bankrupt - in this case this other person is the trustee of the superannuation fund.

* Thirdly, the money must be received from another person - in this case, the person paying the money to the superannuation fund is the bankrupt's employer.

* Fourthly, the payment must be as a result of work done or services performed by the bankrupt. In this case, if it were not for the work done by the bankrupt, the money would not be paid by the employer to the superannuation fund. There is a direct causal connection between the superannuation contribution and the work done by the bankrupt; and in addition the superannuation contribution is calculated as a percentage of the bankrupt's salary.

13. The trustee maintains also, that it is not necessary for the income to be received by the bankrupt; and in accordance with s.139M of the Act, income is taken to be derived by a bankrupt because it is reinvested, accumulated or capitalised. In this matter the moneys are dealt with on behalf of the bankrupt, for the ultimate benefit of the bankrupt. The definitions of "income" under the Act are wide enough, and clear enough, to include superannuation contributions, whether they be compulsory contributions or otherwise.

14. The Inspector-General argues that the purpose of Part VI Division 4B of the Act is to require a bankrupt, who derives income during the bankruptcy, to pay contributions towards the bankrupt's estate. It would be manifestly absurd and unreasonable for the bankrupt to be ordered to make an income contribution from money which he has not received, and over which he has no control. Sub-section 139L(a)(vii) should be interpreted, in light of the purpose of Division 4B of the Act, and in the context of the other sub-sections within s.139L(a) of the Act, which refer only to payments, receipts and benefits actually received by the bankrupt.

15. The Inspector-General maintains also, that where the contributions do not arise from a salary sacrifice, but from a mandatory statutory scheme, it could not be said that the money is received by the superannuation fund "as a result of work done or services performed by the bankrupt", and thus sub-s.139L(a)(vii) of the Act does not apply to these contributions.

16. Section 139L of the Act defines "income" in relation to a bankrupt as having its ordinary meaning as extended by qualifications, including that contained in sub-s.139L(a)(vii) of the Act which provides:

"the amount of any money, or the value of any other consideration, received by a person other than the bankrupt from another person as a result of work done or services performed by the bankrupt, less any expenses (other than expenses of a capital nature) necessarily incurred by the first-mentioned person in connection with the work or services."

17. The Explanatory Memorandum to the Bankruptcy Amendment Bill 1991, which introduced the sub-section reads in part:

"It is quite often the case that a person will establish a shelf company as his or her employer. The person provides services for which the company is paid. If the person ceased employment with the company, the company would be unable to generate any income at all. The company's income may therefore by wholly attributed to the bankrupt. In accordance with this definition, in such a circumstance, the income of the company ... is to be regarded as income of the bankrupt ..."

18. In my view, the mischief the sub-section was addressing, was a situation where the bankrupt in fact, generated the income by work done or services performed, and the moneys were paid to another person or entity, and the bankrupt has access to these funds. In this matter, the superannuation contributions are paid by the employer, by compulsion, and to a third party who holds the funds for the benefit of the bankrupt; but the bankrupt has no access to the funds until his retirement from the workforce.

19. In addition, these compulsory contributions are not payments made by agreement with the employee, in lieu of salary which would otherwise be regarded as income. They are made as a result of a statutory obligation upon the employer which applies to all his employees. The quantum of the employer's contribution depends upon the fact of the individual being an employee, and the level of the employee's income. It does not arise, in my view, as a result of work done or services performed by the bankrupt employee, and does not fall within sub-s.139L(vii) of the Act.

20. In the matter of Thomas Robbins and Insolvency & Trustee Service Australia (AAT 13585, 24 December 1998), Deputy President Gerber was of the view that when assessing the income of the service company which employed the bankrupt, a deduction should not be allowed for the superannuation contributions above the statutory limit. The Deputy President decided that these superannuation contributions should be regarded as "income" for the purposes of assessing income contributions for bankruptcy purposes. In this matter, however, the superannuation contributions are those set by statute, and there is no question of an additional contribution in excess of the statutory limit. The Decision in Robbins is, in my view, not relevant in this matter.

21. In relation to the question as to whether the Medicare levy should be excluded from the bankrupt's income, the trustee submits that the levy cannot be considered as "income tax" for the purposes of sub-s.139N of the Act, which as far as is relevant for the purposes of this review provides:

"139N Income varied by income tax payments and refunds and child support payments

The income that is likely to be derived, or was derived, by a bankrupt during a contribution assessment period:

(a) is taken to be reduced by:

(i) any amount that the bankrupt pays or is likely to be liable to pay, or paid or was liable to pay, as the case may be, during that period in respect of income tax;"

22. The trustee maintains that the Medicare levy is imposed by the Medicare Levy Act (1986) (the Levy Act) and although the mechanism for the recovery of the levy is provided by the Income Tax Assessment Act 1936 (the Assessment Act) this does not mean that the Medicare levy should be taken as income tax. The draftsman of the Act treats income tax differently from the Medicare levy. Sub-section 185C(5) of the Act, which deals with debt arrangements, as an alternative to bankruptcy, defines "after tax income" as follows:

"after tax income in relation to a debtor and a year, means the amount that is likely to be the taxable income of the debtor for the year less the income tax and the medicare levy imposed on that taxable income (worked out treating the year as a year of income if it is not actually a year of income)."

23. The trustee argues that if the draftsman intended the Medicare levy to be included as part of "income tax" in sub-s.139N of the Act, then the draftsman could have stated it specifically; and in addition the Medicare levy can vary depending on the circumstances of the particular person. It would seem unduly complex to import such a variable issue into the calculation of "income" for income contribution purposes under the Act.

24. The Inspector-General submits that the Medicare levy is a form of tax imposed upon income, and accordingly comes within the definition of "income tax" or "tax" as defined in s.6 of the Assessment Act which provides:

"'income tax' or 'tax' means income tax imposed as such by an Act, as assessed under this Act.

[Definition of 'income tax' or 'tax' substituted by Act No 39 of 1997 s 3 and Sch 1, Item 2, with effect from 1 July 1997, applicable to assessments for the 1997-98 year of income and later years of income. The definition formerly read:

'income tax' or 'tax' means income tax or income tax and social services contribution, imposed as such by any Act, as assessed under the Income Tax Assessment Act 1936, or under that Act as amended at any time.]"

25. The Assessment Act, he submits, treats the Medicare levy as part of the total income tax payable by a person. An example of this can be found in s.160ARD4 of the Assessment Act, which provides a formula for calculating the tax payable by top marginal rate taxpayers. This formula includes not only tax payable pursuant to the Assessment Act, but includes a provision in respect of the Medicare levy.

26. The Inspector-General maintains finally, that this construction of s.139N of the Act is consistent with the objects of Part VI Division 4B of the Act, which is to compel bankrupts to contribute from income in respect of which they have a discretion as to how it is spent. Unless the Medicare levy is deducted before assessing a bankrupt's income for contribution purposes, the bankrupt would be compelled to make contributions from income which has been expended, partly, in meeting the Medicare levy.

27. The Levy Act as far as is relevant for the purposes of this review provides:

"Interpretation

3.(1) In this Act, unless the contrary intention appears:

"Assessment Act" means the Income Tax Assessment Act 1936;

"levy" means Medicare levy referred to in section 5.

...

Incorporation

4. The Assessment Act is incorporated, and shall be read as one, with this Act.

Imposition of Medicare levy

5. Medicare levy, to the extent that that levy is payable in accordance with Part VIIB of the Assessment Act, is imposed in accordance with this Act at the rate applicable in accordance with this Act.

Rate of levy

6. (1) The rate of levy payable by a person upon a taxable income is 1.5%.

(2) The rate of levy payable by a person in the capacity of a trustee of a trust estate upon a share of the net income of the trust estate to which a beneficiary is presently entitled, being income in respect of which the trustee is liable to be assessed pursuant to section 98 of the Assessment Act, is 1.5%."

28. Section 251S of the Assessment Act as far as is relevant for the purposes of this review provides:

"Medicare levy

251S(1) Subject to this Part, a levy by the name of Medicare levy is levied, and shall be paid, at the rate applicable under the relevant Act imposing the levy, for the financial year that commenced on 1 July 1983, and for each succeeding financial year, upon -

(a) the taxable income of the year of income of a person, not being a company or a person in the capacity of a trustee, who, at any time during the year of income, was a resident of Australia otherwise than by virtue of subsection 7A(2);"

.

29. In accordance with s.5 of the Levy Act, the Medicare levy is imposed to the extent that it is payable under Part VIIB of the Assessment Act (sub-ss.251R to 251Y). Those individuals liable, are those who at any time during the income year, were, for income tax purposes, resident in Australia. The levy is payable also on trust income to which a resident individual is presently entitled, and on trust income (except trust income of a deceased estate) to which no beneficiary is presently entitled. Relief from the levy is given to certain low income earners, and to persons who qualify as "prescribed persons" pursuant to s.251U(1) of the Assessment Act. These include persons entitled to full medical treatment under Repatriation or Defence Force arrangements and recipients of Sickness Allowance or Disability Support Pension under the Social Security Act 1991.

30. Section 251R of the Assessment Act contains a number of definitions and other interpretive provisions including sub-s.251R(7) which reads, significantly:

"In this Act (other than this Part, the definition of "year of tax" in subsection 6(1), section 102AAN, Division 17 of Part III and sections 160AQU, 160AQX, 160AQY and 160AQZ) unless the contrary intention appears, "income tax" or "tax" includes levy payable in accordance with this Part."

31. The exceptions, e.g. the rebate provisions in ss.159H to 160AD, and the franking rebates allowable under Part 111AA, are few, and designed to cover specific scenarios. The general intent, is that, unless the contrary intention appears, the Medicare levy is included in the terms "income tax" or "tax" under the Assessment Act. It is clearly "income tax" for the purposes of the Act, and in accordance with s.139N of the Act the bankrupt's income is taken to be reduced by the amount he is liable to pay in respect of the Medicare levy.

32. I considered the parties' submissions carefully. Whilst in my view, s.251R(7) of the Assessment Act renders the arguments irrelevant, I would have decided to accept the Inspector-General's submissions in any event, because, in my view, the Medicare levy is a tax on "income", and would come within the definition of "income tax" in s.6 of the Assessment Act. In addition, I consider that the definition of "after tax income" in sub-s.185C(5) of the Act, treats the Medicare levy as an element of the total income tax payable by a person for the purposes of the Act.

33. I am satisfied that neither the compulsory superannuation contributions made by the bankrupt's employer, nor the Medicare levy payable by the bankrupt was "income" for the purposes of the Bankruptcy Act 1966. I am satisfied, therefore, that the Inspector-General correctly excluded both the superannuation contributions and the Medicare levy from the bankrupt's total income threshold amount.

34. For these reasons the Tribunal affirms the decision under review.

I certify that the 34 preceding paragraphs are a true copy of the reasons for the decision herein of Miss WJF Purcell (Senior Member)

Signed: A Brown

Personal Assistant

Date/s of Hearing 21 September 1999

Date of Decision 16 February 2000

Counsel for the Applicant Mr Rodgers

Solicitor for Applicant Gadens Lawyers

Counsel for the Respondent Ms Ford

Solicitor for the Respondent AGS