Cleland and Inspector-General in Bankruptcy

[2006] AATA 561

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 561

ADMINISTRATIVE APPEALS TRIBUNAL          № V2005/810

GENERAL  ADMINISTRATIVE DIVISION

Re:            ANDREW EDMUND CLELAND

Applicant

And:INSPECTOR-GENERAL IN BANKRUPTCY

Respondent

DECISION

Tribunal:       Mr B.H. Pascoe, Senior Member

Date:28 June 2006

Place:Melbourne

Decision:The Tribunal varies the decision under review to the extent of reducing the assessed income to $47,208.12 under s 139S of the Bankruptcy Act 1966 (the Act) and the contribution payable under s 139P of the Act to $5,508.71 in respect of the contribution assessment period from 13 November 2003 to 12 November 2004.

(sgd) B.H. Pascoe

Senior Member

BANKRUPTCY – contribution assessment period – reduction of income for income tax – liability to pay income tax during period

Bankruptcy Act 1966

Re Newcombe and Inspector-General in Bankruptcy (2004) 85 ALD 402

Re Pattison and Inspector-General of Bankruptcy; Ansett (party joined) (1994) 32 ALD 679

REASONS FOR DECISION

28 June 2006  Mr B.H. Pascoe, Senior Member

1. This is an application to review a decision of a delegate of the Inspector‑General in Bankruptcy, the respondent, which assessed the liability of the applicant, Mr A. Cleland, to make a contribution of $7,704.65 pursuant to s 139S of the Bankruptcy Act 1966 (the Act) in respect of the contribution assessment period (CAP) from 13 November 2003 to 12 November 2004.

2.      Mr Cleland became bankrupt on 13 November 2001 pursuant to a sequestration order made on the application of the Deputy Commissioner of Taxation.  On 31 March 2005, the trustee made an assessment of his liability for the November 2003 to November 2004 CAP at $5,852.55.  On 31 May 2005 Mr Cleland applied to the respondent for a review of that assessment.  On 22 June 2005, the trustee provided a revised contribution assessment of $9,881.29.  On 4 August 2005, the respondent provided a fresh assessment resulting in a contribution liability of $7,704.65.  It is this assessment which is before the Tribunal.

3.      At the hearing there was no dispute on behalf of Mr Cleland as to the calculation of income derived by him during the CAP.  For the whole of this time he was in receipt of income replacement payments under a policy with Tower Australia Ltd (Tower) amounting to $4,300 per month or $51,600 for the 12 month CAP.  From that total was deducted the actual income threshold amount under s 139K of the Act of $36,190.70.  The contribution assessment of $7,704.65 equalled 50 per cent of the excess.

4.      The only matter in dispute was whether and to what extent the gross income of $51,600 should be reduced by liability to income tax.  It was clear that the income replacement payments were assessable income under the Income Tax Assessment Act 1997 and no PAYE deductions had been made by Tower.

5.      It was submitted on behalf of Mr Cleland that the gross income should be reduced by an estimate of the amount of income tax which would be payable on an income of $51,600.  A letter from his accountant was tendered stating that his gross income for the CAP was $45,118 with a tax liability of $10,384 producing a net income of $34,734.  No details of the calculation of $45,118 as compared with the respondent’s calculation of $51,600 was provided.  Neither was any reconciliation of this latter amount with the taxable income of $32,751 for the year ended 30 June 2004 and $42,662 for the year ended 30 June 2005 provided.  Given the acceptance of the respondent’s income calculation at the hearing it is not appropriate to embark on any attempt to reconcile these apparent differences.

6.      Section 139N of the Act provides:

(1)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 (but not including any amount this is in respect of a provable debt); and

…

7.        In Re Newcombe and Inspector-General in Bankruptcy (2004) 85 ALD 402, Deputy President Jarvis described the effect of s 139N in the following terms (at pages 409 ‑ 410):

Section 139N(a)(i) provides for four alternative methods of reducing the assessed income of a bankrupt namely:

·   any amount that the bankrupt pays during the CAP in respect of income tax;

·   any amount that the bankrupt is likely to be liable to pay during the CAP in respect of income tax;

·   any amount that the bankrupt paid during the CAP in respect of income tax; and

·   any amount that the bankrupt was liable to pay during the CAP in respect of income tax.

The subsection does not indicate which of the four alternatives should be applied in a particular case.  The second reading speech when the 1991 amending Bill providing for the income contribution regime was introduced in the Senate does not assist in determining which of the alternatives is to apply, and the examples of the application of the section in that speech merely refer to the “after tax income” of a bankrupt.  The explanatory memorandum in respect of the amending Bill also does not assist in interpreting s 139N.

It appears that the purpose of s 139N of the Act was that a bankrupt’s income should be assessed on an after-tax (and after-child support) basis in order to calculate his or her contribution liability.  The reduction for tax is calculated not by reference to the tax assessed in respect of a CAP (which was the effect of the contention made on Dr Newcombe’s behalf), but by reference to the amount of tax paid or the liability to pay tax “during” the relevant CAP.  In Deputy Commission of Taxation v Kavich (1996) 68 FCR 519 ; 138 ALR 323 the Full Court of the Federal Court decided that income tax only becomes a debt due when it is assessed and notice is served of that assessment, and it does not become payable before the date fixed by s 204 of the ITA Act.  Following the introduction of the Pay As You Go (PAYG) instalments system as from 1 July 2000, which is provided for in Pt 2-10 Div 45  of Sch 1 to the Taxation Administration Act 1953 (Cth), taxpayers are also required to pay tax on a quarterly or annual basis.  Liability to pay tax also arises pursuant to that system within a short period after the end of the relevant quarter or annual period, as well as on the date for payment fixed by s 204.

The effect of the decision in Re Pattison and Inspector-General of Bankruptcy; Ansett (1994) 32 ALD 679 was that either the amount paid during the period or the amount liable to pay was acceptable provided the method was consistently applied in each CAP to avoid double counting.

8.        While as said by Deputy President Jarvis, the purpose of s 139N of the Act may be seen as being to assess a bankrupt’s income on an after tax basis, the clear wording of the section does not allow for an estimate of tax which will be payable on the gross income at some time.  It allows only for tax paid or actually liable to be paid within the CAP.  Another letter from Mr Cleland’s accountant set out the due dates for payments of income tax in the relevant CAP as:

2 March 2004               PAYG income tax instalment for  $1,444.00

the period ended 31 December 2003

12 March 2004             Income tax assessment for the year               $2,348.88

ended 30 June 2003

11 November 2004     PAYG income tax instalment for the                   $599.00

period ended 30 September 2004                    ________

$4,391.88

There was no evidence of whether these amounts were actually paid during the CAP.

9.        After the hearing, the respondent provided a written submission in which it was said that the amount of $4,391.88 would be accepted as the amount which Mr Cleland was liable to pay in respect of income tax during the CAP.  Such acceptance appears appropriate in the circumstances in this case.

10.      In view of the above, I find that the amount that Mr Cleland was liable to pay during the CAP of 13 November 2003 and 12 November 2004 in respect of income tax was $4,391.88.  It follows that his income for contribution assessment purpose for that CAP was $47,208.12.  After deduction of the actual income threshold of $36,190.70, the excess was $11,017,42 and 50 per cent thereof or $5,508.71 is the contribution which Mr Cleland is required to pay to his trustee pursuant to s 139P of the Act.  The decision under review should be varied to that extent.

I certify that the ten [10] preceding paragraphs are a true copy of the reasons for the decision herein of

Mr B.H. Pascoe, Senior Member

(sgd):      Olympia Sarrinikolaou

Clerk

Date of Hearing:  8 May 2006

Date of Decision:  28 June 2006
Advocate for the applicant:          Self-represented

Solicitor for the respondent:        Mr S. Linden, Australian Government Solicitor