Dunwoody and Inspector-General in Bankruptcy
[2003] AATA 1284
•17 December 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 1284
ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q2002/60
GENERAL ADMINISTRATIVE DIVISION
)
Re JOHN ERNEST DUNWOODY Applicant
And
INSPECTOR-GENERAL IN BANKRUPTCY
Respondent
DECISION
Tribunal Ms J Cowdroy, Member Date17 December 2003
PlaceBrisbane
Decision The Tribunal sets aside the decision review and substitutes for it a decision that the following amounts should be regarded as income for the purposes of calculating the applicant’s contribution during the period 9 October 1988 to 8 October 1999:
Gross Income $30,000.00
Legal Expenses $50, 576.05
Accountancy Expenses $53,340.90
...................(Sgd).........................
J Cowdroy
Member
CATCHWORDS
BANKRUPTCY – contribution assessment – calculation of contribution assessment – assessment of income that was likely to be derived or was derived during the contribution assessment period – value of income derived from employment – value of benefits provided by third parties
Bankruptcy Act 1966, ss 139L, 139W(1), 139W(2), 139Y
Bankruptcy Legislation Amendment Act 1966, s 139W(1) and s 139W(2)Fringe Benefits Tax Assessment Act 1986, ss 20, 136, 144
Challen v Bendeich [1999] FCA 845
REASONS FOR DECISION
17 December 2003 Ms J Cowdroy, Member 1. This decision relates to a review of a decision of the Delegate of the Inspector-General in Bankruptcy dated 19 December 2001, which issued a contribution assessment to the applicant for the period 9 October 1998 to 8 October 1999.
Hearing
2. The matter was heard on 4 and 5 December 2002 and 24 January 2003. Mr Dunwoody was self-represented and gave evidence. He called Anthony Bennett and Michael Hickman to give evidence. The respondent, represented by Mr McQuade of Counsel, called Roderick Mumford and made Terence Clarke available for cross-examination by the applicant.
3. The “T” Documents, pursuant to section 37 of the Administrative Appeals TribunalAct1975, were entered into evidence as Exhibit E1, together with the following exhibits:
§Exhibit E2 Respondent’s Statement of Facts and Contentions
§Exhibit E3 Batch of documents headed “Witness Statement” dated 6 May 2002 and supporting attachments
§Exhibit E4 Statement of Michael David Hickman, 5 November 2002
§Exhibit E5 Statement of Roderick Ernest Mumford, 16 September 2002
§Exhibit E6 Transcript of Public Examination of Mr Dunwoody and Mr Hickman
§Exhibit E7 Copy of Signed Client Care Agreement between Mr Bennett and Mr Dunwoody
§Exhibit E8 Copy of judgment in Sherry v Jefferson [1998] FCA 1719
§Exhibit E9 Bundle of Accounts – Bennett and Philp, Solicitors
§Exhibit E10 Transcript of Public Examination of Mr Collier dated 30 October 2000
4. The matter was decided on the basis of the oral evidence of the applicant and the witnesses, the exhibit material and the written and oral submissions of the parties.
Background to the Application
5. It is not disputed that the applicant became bankrupt following the filing of his debtor’s petition on 9 October 1998. On that date Messrs Philip Jefferson and Jay Stevenson consented to, and were appointed as, Trustees of the bankrupt’s estate. On 9 August 1999, a meeting of the creditors passed a resolution for the removal of the Trustees and upon this occurring, the Official Trustee (“the Trustee”) became Trustee of the bankrupt’s estate.
6. The Trustee issued compulsory contribution assessments dated 23 June 2000, 12 July 2000 and 22 March 2001 to the applicant for the period 9 October 1988 to 8 October 1999 (“CAP1”). By letter dated 9 November 2001, the applicant asked the respondent to review the income assessments made by the Trustee, and, by letter dated 19 December 2001, the Trustee advised the applicant that it had set aside the previous assessments and had made a fresh assessment.
7. On 18 January 2002 the applicant lodged an application to the respondent to review the decision made by the Trustee on 19 December 2001.
The Issues
(1)Whether the original assessment made by the Trustee, after the expiration of the contribution assessment period, was authorised by the relevant legislation.
(2)What amount of income did the applicant derive from employment for the period 9 October 1998 to 8 October 1999 or might reasonably be expected to have been received by a person who engaged in similar employment?
(3)What was the value of the benefits provided by third parties to the applicant during the period 9 October 1998 to 8 October 1999 in respect of the payment of legal expenses?
(4)What was the value of the benefits provided by Hickman and Associates during the period 9 October 1998 to 8 October 1999 in respect of services performed for the applicant at no charge?
The Legislation
Issue 1
8. The authority under which the Trustee issues compulsory contribution assessments (CAP) is contained in subsection 139W(1) and (2) of the Bankruptcy Act 1966 (“the Act”).
9. Immediately prior to the enactment of the Bankruptcy Legislation Amendment Act 1966 (“the December 1996 amendments”), subsections 139W(1) and (2) of the Act provided:
“(1)As soon as practicable after the start of each contribution assessment period in relation to a bankrupt, the trustee is to make an assessment of the income that is likely to be derived by the bankrupt during that period, of the actual income threshold amount that is applicable in relation to the bankrupt when the assessment is made and of the contribution (if any) that the bankrupt is liable to pay in respect of that period under section 139S.
(2)If at any time, whether during or after a contribution assessment period but before the bankrupt is discharged, any one or more of the following paragraphs apply:
(a)the trustee is satisfied that the income that is likely to be derived, or was derived, by the bankrupt during that period is or was greater or less than the amount of that income as assessed by the last preceding assessment in respect of that period;
…
the trustee is to make a fresh assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period, of the actual income threshold amount that is applicable in relation to the bankrupt when the assessment is made and of the contribution (if any) that the bankrupt is liable to pay in respect of that period.”
10. After the commencement of the December 1996 amendments, subsections 139W(1) and (2) provided:
“(1)As soon as practicable after the start of each contribution assessment period in relation to a bankrupt, the trustee is to make an assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period, of the actual income threshold amount that is applicable in relation to the bankrupt when the assessment is made and of the contribution (if any) that the bankrupt is liable to pay in respect of that period under section 139S. [amendment highlighted]
(2)If at any time, whether during or after a contribution assessment period but before the bankrupt is discharged, any one or more of the following paragraphs apply:
(a)the trustee that the income that is likely to be derived, or was derived, by the bankrupt during that period is or was greater or less than the amount of that income as assessed by the last preceding assessment in respect of that period;
…
the trustee is to make a fresh assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period, of the actual income threshold amount that is applicable in relation to the bankrupt when the assessment is made and of the contribution (if any) that the bankrupt is liable to pay in respect of that period.” (amendment highlighted)
Issue 2
11. In having regard to the applicant’s income, section 139Y of the Act is relevant. It provides:
“(1) If:
(a) the bankrupt is engaging or has engaged during a contribution assessment period in employment or other work or in activities that resemble employment or other work; and
(b) the bankrupt does not receive or did not receive any remuneration in respect of the employment, work or activities or receives or received remuneration that is less than the remuneration (in this subsection called the reasonable remuneration) that:
(i) in the case of employment where an industrial award or agreement prescribes rates or minimum rates of salary or wages for the employment—might reasonably be expected to be or to have been received by the bankrupt in respect of the employment by virtue of that award or agreement; or
(ii) in any other case—might reasonably be expected to be or to have been received by a person who engaged in similar employment, work or activities where there was no relationship or other connection between that person and the person for whom the employment, work or activities were carried out;
then, for the purpose of making an assessment, the trustee may determine that the bankrupt receives or received the reasonable remuneration in respect of the employment, work or activities.
(2) If:
(a) the bankrupt enters or entered during a contribution assessment period into any transaction that might reasonably be expected to produce or to have produced income; and
(b) the bankrupt does not derive or did not derive any income from the transaction or derives or derived income that is less than the income (in this subsection called the reasonable income) that might reasonably be expected to be or to have been derived if the transaction were or had been entered into at arm's length;
then, for the purpose of making an assessment, the trustee may determine that the bankrupt derives or derived the reasonable income from the transaction.”
Issues 3 and 4
12. The relevant provisions in relation to these issues are section 139L of the Act and sections 20, 136 and 144 of the Fringe Benefits Tax Assessment Act 1986. They relevantly provide as follows:
“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.”
and
“20. Expense payment benefits
Where a person (in this section referred to as the provider):
(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient ) to pay an amount to a third person in respect of expenditure incurred by the recipient; or
(b) reimburses another person (in this section also referred to as the recipient), in whole or in part, in respect of an amount of expenditure incurred by the recipient;
the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.
…
136. Interpretation
(1) In this Act, unless the contrary intention appears:
‘benefit’ includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:
(a) an arrangement for or in relation to:
(i) the performance of work (including work of a professional nature)
…
144. Deemed payment
For the purposes of Part III, any conduct by a person that effects or results in a discharge or extinction of an obligation of another person to pay an amount to a third person shall be taken to constitute the payment of the amount by the first-mentioned person.”
EvidenceJohn Ernest Dunwoody
13. Prior to his bankruptcy, Mr Dunwoody was working as a manager for Seaforth, a cane farming property consisting of some 1000 acres, of which 540 acres was under cane. He had been the owner of that farm since approximately April 1986. He holds a Diploma in Horticulture, a Bachelor’s Degree in Horticulture and a Master’s Degree in Science.
14. Shortly prior to presenting his petition in bankruptcy on 9 October 1998, the Seaforth farm was sold to Chelmscliff Pty Ltd (Chelmscliff), following discussions with, and acting upon the advice of Mr Hickman, his accountant.
15. Prior to the transfer of the property to Chelmscliff, he made the management decisions relative to the operation of the property. After the property ownership changed, his role changed “drastically and dramatically”.. He carried out his duties at the directions of the directors and whilst his advice may have been sought on various matters, he did not “act in a manner to foreshadow a director or to guide a director in a particular position”. The successive directors from whom he received instructions were in sequence, Michael David Hickman, Kenneth Robert Dunwoody, (his brother), and David John Collier. He was not aware of any experience Mr Hickman had in operating a cane farm, however he was aware he had considerable experience in managing companies.
16. The amount of farm work in which he was involved decreased in about November/December 1998, which is at the end of the crushing season. From that time, he had a supervisory and overseer role, but he did not do any day-to-day farm work. Farm employees performed most of the work until the start of the planting season in about June 1999, at which time he again worked on the farm.
17. From the time of his bankruptcy until the end of December 1998, his work involved the supervision and demonstration to other employees of farm tasks, repairing equipment, assisting with the fertilising, herbicide spraying, and other matters associated with harvesting. During that time he had three or four discussions with Mr Hickman per week in relation to the farm operations.
18. From 1 January 1999 to 30 June 1999, he supervised farm activities and maintenance activities. From early July 1999, preparation was made for planting which included ground preparation. Once planting occurred, maintenance of the crop was required as well as overseeing the harvesting contractor.
19. A group certificate prepared and signed by him on behalf of Chelmscliff. T9/63 records that, for the period 26 September 1998 until 30 June 1999, he received an income of $3425. Although a document titled “Statement of Affairs” completed and signed by him on 7 October 1998 records an amount of $450 gross being earned per week in the capacity of farm hand, he did not receive this amount. He had recorded that amount after receiving advice from Mr Hickman that he should record a wage that was appropriate for the industry. A group certificate for the year 2000 prepared and signed by him discloses income of $8597 from Chelmscliff for the period 1 July 1999 to 1 December 1999.
20. He agreed he indicated during examination by the Official Trustee in Bankruptcy in the Federal Court of Australia on 23 March 2000 that he had worked 70 hours a week whilst he was involved with Chelmscliff, which was a similar working pattern when he owned the Seaforth farm. However, he contended that from the time of his bankruptcy, he devoted considerable energies in dealing with matters flowing from his bankruptcy. When pressed in cross-examination as to the specifics of those bankruptcy matters, he referred to a four-drawer filing cabinet of documents, a lot of which was privileged material. He referred to section 73 composition proposals, a consent order to manage the property, and communication with creditors. He said the work associated with the section 73 composition entailed a considerable amount of time and effort.
21. Because of the time and effort devoted to such activities, it was impossible to perform sufficient farm work to justify an income of $23,000 or $30,000. He contended that during CAP1 the income he received in his employment with Chelmscliff was either $9446.69 or $9987.50. Those amounts were based upon time sheet records and group certificates from Chelmscliff.
22. He had indicated on an income questionnaire signed on 18 January 2001 that he was earning $369.55 fortnightly in the capacity of part time farm manager for Lingo Enterprises Pty Ltd. That company then operated the farm, which had been purchased by Revewood Pty Ltd (Revewood). A group certificate prepared and signed by Mr Dunwoody in respect to the period of employment with Revewood states that from 9 December 1999 to 30 May 2000 he received income of $9717.
23. In cross-examination, he contended that he was fairly paid for all the work that he performed for Chelmscliff during the assessment period. When it was pointed out that, in answers provided in an income questionnaire dated 21 December 1999 (T9/61), he had stated: “Many weeks the company had no money to pay me so I went without any pay”, he agreed that that statement was probably more accurate than his present memory. Notwithstanding that, he contended that the group certificates reflected the full entitlement he had to be paid by Chelmscliff, on the basis that in some weeks he was paid a full wage when he did not work for 40 hours, particularly in the November/December 1998 period. He considered that, on balance, he was appropriately remunerated for his work efforts, when viewed over the entire CAP1 period.
24. He stated that he was not aware that Mr Hickman was involved in his bankruptcy affairs other than discussions with Mr Bennett on his behalf and at his request. However, he had subsequently become aware that Mr Hickman had greater involvement. Telephone discussions he had with Mr Hickman during CAP1 mainly involved issues concerning farm management.
25. Mr Dunwoody stated that various documents. Including e-mails and facsimiles which were prepared and sent by him to various people had occurred at the direction of the directors of Chelmscliff (T11/119 onwards). He stated that he sent some of the e-mails on behalf of Mr Collier because he was not computer literate. For example, he prepared an application for funding for Revewood because he was aware of the costs in running the farm. Although the term “we” was used by him, it was couched in a general way, and in no way should it be inferred that he had any capacity to make any commitment on behalf of Revewood. Nor did he have any legal authority to make any commitment on behalf of Chelmscliff.
26. He acknowledged receiving an e-mail from Michael Hickman (T11/139/141) dated 27 June 2000 addressed to “All concerned with the Seaforth Property Trust” which refers to the difficulties in obtaining “cohesion of a coalition of interested parties”. Although Mr Hickman refers to earlier agreements and discussions, Mr Dunwoody pointed out that he was not necessarily a party to those.
27. A letter dated 3 July 2000 from Mr Peter Dunwoody making certain criticisms of Mr Dunwoody’s actions in relation to his business methods, including reference to a “power game” and his “involvement with other people’s monies” was received by the applicant, however he did not recall having any specific discussion with his brother about its contents.
28. The applicant was asked to comment on an e-mail dated 3 August 2000 which he sent to Michael Hickman at T11/142 in which he stated that he had signed an offer “which is verbally agreed to by the other Dunwoody beneficiaries of the SPT” (Seaforth Property Trust). He indicated that he had handwritten an offer to Mr Collier in an attempt to pacify his attempts at blackmail. He said that his letter had no legal authority. He indicated that the offer was for a parcel of land from the Seaforth farm.
29. He stated relevantly:
“I reiterate that in doing it I knew that I had no legal capacity to do it, that the – all the titles of the property were covered by first mortgages, believed, or covered by mortgages to the Westpac Bank and that in the normal context of that no mortgagee would agree to it.” (page 44 of transcript)
30. Mr Dunwoody engaged the professional services of Bennett and Philp for bankruptcy matters in respect of which he signed a retainer agreement on about 6 October 1998. He acknowledged that Mr Bennett was involved in numerous matters in connection with his bankruptcy, including the preparation of advice in respect to two section 73 proposals during the CAP1 period. He acknowledged asking Mr Hickman to liaise with Mr Bennett on his behalf. He stated that he had no idea of the amount of time Mr Bennett had spent on those matters, or the basis upon which he charged out his work.
31. He had scrutinized the fees charged by Mr Bennett in respect of his services and he had itemised the items where other parties were the beneficiaries of the fees. He had assessed the beneficiaries of Bennett and Philp's work on the basis of his knowledge of the type of legal activities that were occurring at the time which are contained in records which he held, but which were not produced as evidence.
32. For example, he had attributed some costs to Mr Philip Jefferson on the basis that Mr Jefferson had written to, and had telephone discussions with, his solicitor, who had incurred costs in responding. When pressed, he was unable to state the basis of his premise that the telephone calls had been initiated by Mr Jefferson, rather than Mr Bennett.
33. Further, his interpretation of the records of Mr Bennett was that telephone calls from Mr John Elliott, acting for John L Sherry, to Mr Bennett, should be attributed as a benefit to J L Sherry. He considered his solicitor’s involvement in defending him in litigation instigated by Mr Sherry was not a benefit to him.
34. In respect to the database print out for Hickman and Associates, Mr Dunwoody stated that he had paid Mr Hickman an initial payment prior to submitting his petition for bankruptcy, however he had made no payment to, nor had he received any invoice for payment from Mr Hicks since that time.
35. The amount of time recorded against his name in Mr Hickman’s records, he suggested, “would be nothing, nothing like this”.. He suggested that between two and four percent of the time said to be allocated to his affairs, was attributable to the work Mr Hickman spent on his bankruptcy matters.
36. He suggested that any work:
“whether it was the management of the property, whether it was the financial affairs of Chelmcliff, whether it was a consent order for Chelmscliff, whether it dealt with the Seaforth property – the Seaforth Property Trust, the Mackay Dunwoody Trust; it was just thrown under DUNWEJ.” (page 60 of transcript)
Anthony James Bennett
37. Mr Anthony James Bennett, solicitor of Bennett and Philp, represented the applicant on various legal matters from 8 October 1998 to 9 October 1999 in respect to his bankruptcy. He obtained a signed client agreement from the applicant.
38. The applicant was referred to him by Mr Hickman. During the period he acted for the applicant in relation to court orders restricting him from disposing of his assets and other bankruptcy issues generally. Although an estimate of fees was given in the region of $2500, the fees incurred were significantly more. The fees were recorded in one file in the applicant’s name. There may have been another file opened in relation to his examination pursuant to section 81 of the Act.
39. In cross-examination he reiterated that any work carried out for entities or persons other than Mr Dunwoody, either by himself or other members of his firm, was recorded on separate accounts. Although his firm represented other parties known to Mr Dunwoody, he personally only acted for the applicant and the work was charged to his file. He also acted for the applicant on his instructions in defending an action initiated by J L Sherry and others. In respect of any meetings or conversations that were recorded as occurring with Mr Hickman, these related to the affairs of solely of Mr Dunwoody.
40. Mr Bennett acted for the applicant in the public examination before the Federal Court of Australia in respect to his bankruptcy. During the course of that public examination, a direction was made by the Registrar for Mr Dunwoody to provide details of the legal fees undertaken by his firm. He had provided accounts in response to that direction.
41. Legal costs for Bennett and Philp’s professional services were charged to an account in the name of the applicant in the sum of $50,576.05. Invoices to Mr Dunwoody from Bennett and Philp during CAP1 are contained in Exhibit E9.
Terence David Clarke
42. Mr Clarke was employed by the Inspector-General in Bankruptcy, in which capacity he conducted reviews of bankrupt estates. He initially assessed the applicant’s contribution liability for CAP1 at $13,893.90. In a fresh assessment dated 19 December 2001, he determined the applicant’s income to be $10,402.85 (T3). He attributed the different amounts of income to information he obtained during a conversation with Mr Hickman, which led him to the conclusion that he was not able to determine an amount that could be construed as income for the services provided to the applicant by Mr Hickman.
43. However, over the passage of time he had received further information, and consequently the applicant’s income was varied. In particular, he had not had access to the agreement with Bennett and Philp when he carried out the earlier assessment of income.
Roderick Ernest Mumford
44. Mr Mumford is a case manager with Insolvency and Trustee Services Australia (ITSA) and has held that position for 12 years. He has been involved in the administration of the applicant’s bankruptcy since August 1999. He was responsible for issuing the income contribution assessments to Mr Dunwoody. He produced a statement with was entered into evidence as Exhibit E5.
45. Mr Mumford acknowledged that there were a number of conflicting figures given for the basic income threshold allowance in the documents issued to the applicant. He had been given a two-page printout that set out the times spent by the Hickman firm in dealing with the affairs of the applicant, Bechrose and Chelmscliff during CAP1. The printouts had not been costed out, however, he calculated the value of the work recorded therein on the basis of the level of expertise held by Mr Hickman and his employees. The charge out rates for Mr Hickman and his employees were obtained from a proof of debt which Mr Hickman lodged in respect to Mr Dunwoody’s bankruptcy.
46. The decision to deem the applicant’s income at $30,000 was based on his level of experience, his qualifications, the hours he worked and the fact that he was the general and financial manager of the farm. The Trustee had formed the view, based on the documents before it, that Mr Dunwoody controlled the farm in co-operation with Mr Hickman and that a nominee director, Mr David Collier, was appointed as a director of Chelmscliff. It was on the basis of such information that the objection to discharging the applicant from bankruptcy was lodged.
47. Mr Collier had admitted in an examination pursuant to section 81 of the Act he had no control over the finances of the farm and that all decisions had been made by the applicant and Mr Hickman. Mr Collier had stated that he merely signed papers that were put before him. (A copy of the transcript of public examination of Mr Collier dated 30 October 2000 was entered into evidence as Exhibit E10).
Michael David Hickman
48. Mr Hickman is the principal of an accountancy practice, Hickman and Associates, operating in South Brisbane. From possibly October 1988 until about January 1999, he was a director of Chelmscliff. He was the foundation director of the company and Hickman and Associates provided accountancy services to Chelmcliff both during the period of his directorship and thereafter. He was subsequently appointed as a director of Bechrose, whose sole purpose for incorporation was to act as the replacement mortgagee for Westpac. He produced a statement, which was entered into evidence as Exhibit E4.
49. He stated that he was involved in negotiations with relevant parties with the objective of terminating Mr Dunwoody’s bankruptcy, although he could not recall the applicant asking him to do so. He stated his instructions came from Ken Dunwoody. He stated that he was unsure what knowledge the applicant had of the activities he was undertaking on his behalf. In cross-examination he stated that he did not recall the applicant instructing him in respect to his bankruptcy affairs, and that he took it upon himself “to do certain things”.
50. He accepted that he attended meetings dealing with the applicant’s bankruptcy affairs, including meetings with creditors and solicitors. He attended the meetings with a view to benefiting not only the applicant, but also his financiers, Mrs Dunwoody, Peter Dunwoody, Bechrose and his accounting firm which was working without being remunerated for its efforts.
51. When asked as to what records he made in respect to the time spent on this matter he stated:
“The recording – we had a data base of information. It’s not mandated in the best particular way. Times were recorded down on it, certainly, but not all the times, and sometimes it wouldn’t be necessarily reflective of – those time sheets were as much as management tools as anything else, for my own purposes, running my own practice.” (transcript at page 119)
52. He stated that employees, Jan Andrews (noted in T11 as JA) and his wife, Marj (noted in T11 as MIH), would not have been involved in undertaking any work for the applicant’s bankruptcy, despite the fact their work is coded against client code DUNWEJ (the client code for the applicant recorded in the accounts of Hickman and Associates). He stated:
“There is no science to these time sheets. They’re – you know – we don’t – they should be right, but there’s errors all through them. I mean, it’s the nature of an accountancy practice. I don’t think an accountant in Australia would turn round and say that his billing system reflects everything as being correct. It’s a source of quite some acrimony with clients at times.” (transcript at page 121).
53. Additionally, not all the times entered under the charge code (MDH), referring to the provisional of his personal services under the client code DUNWEJ were spent on bankruptcy matters for the applicant.
54. Whilst he was a director of Chelmscliff, the applicant reported to him “basically on a daily basis”, he would take recommendations from the applicant and then a decision would be made and the applicant would receive instructions. On various occasions he asked the applicant to provide spreadsheets with various parameters on it and financial analysis of the various alternatives formed the source of the decision making process.
55. Whilst time spent on some matters should have been recorded as being work carried out for Chelmscliff, this probably did not occur. He contended that the firm’s recording work for Chelmscliff was “perhaps very sloppily done” (pg 124 transcript).
56. He acknowledged that he had quite extensive involvement in a number of legal actions arising from the applicant’s bankruptcy. However, the time expended in those tasks could have been recorded under any of the three categories, DNWEJ, CHELMS or BECHROSE.
57. When pressed as to what code such transactions were recorded, he stated:
“They could have been recorded under either. And it would appear to me as though they have been recorded in both.
On what basis do you say they might have been recorded or that they could have been recorded in both?---Just on my knowledge, the way that I handle these things, Ernest. I’m not the – I’m not renown from crossing I’s and dotting Ts too well. (transcript at page 124)
…
It would come under one of those three. There was a lot of crossover, of course, between all of these. Sometimes you didn’t know who you were talking to. I think it was all collectively the issue, wasn’t it?” (transcript at page 129)
58. He stated that the purpose of his time sheets were “partly for billing purposes”. He had not sent any bill arising from those costs sheets to the applicant.
59. He was unable to quantify the hours he spent during CAP1 on the applicant’s bankruptcy matters. He acknowledged that he had stated, as recorded in the transcript of evidence arising from his public examination:
“Since October I have been involved in Mr Dunwoody’s legal affairs. I’ve acted on Mr Dunwoody’s affairs in communicating with Mr Bennett.” (Exhibit E6 at page 476)
60. He acknowledged, when pressed, that his firm had rendered several accounts to Bechrose, including charges for the assignment of mortgage from Chelmscliff to Bechrose. He agreed attending meetings with Mr Bennett, but it would be incorrect to say that they were all on Mr Dunwoody’s behalf, despite the fact they are charged out to him.
61. Counsel put before the witness the costing records of Mr Bennett pertaining to telephone conversations with him, where Mr Bennett had recorded the time spent was chargeable to Mr Dunwoody in respect to his bankruptcy matters. Although Mr Hickman’s records correlated with those of Mr Bennett in respect to the time, date and the length of time spent in such conversations, he contended that it was not necessarily the case that he was acting for Mr Dunwoody. It was more likely that he was acting for Chelmscliff.
Submissions
The Applicant
62. The applicant contends that his total gross income for the period 9 October 1988 to 8 October 1999 was $9,446.69. This has been calculated on the basis of a group certificate for the financial year 1998/1999 from Chelmscliff in the sum of $3,425 less $811.21 which represents amounts before CAP1 commenced, amounting to $2,613.95.
63. This amount is combined with an amount of $6,832.74, which is the amount derived during the CAP1 period from Chelmscliff for the financial year 1999-2000 and in respect of which a group certificate in the sum of $8,597 was provided.
64. The respondent had issued compulsory contribution assessments for the period 9 October 1998 to 8 October 1999 on 23 June 2000, 12 July 2000 and 22 March 2001. Following a request made by the applicant to review the said income assessments made by the respondent, it set aside the assessment and made a fresh assessment. The applicant sought the withdrawal of the notice of 23 June 2000 on the basis that as it was made after the expiration of the CAP, it was not authorised by the Act. It followed that any subsequent assessments had no validity.
65. The applicant contended it was inappropriate for the respondent to deem that he received an income of either $30,000 or $23,400. These amounts are referable to what a person in the position of farm manager and farm hand respectively would reasonably have been expected to have received. The respondent had placed undue weight on his indication during evidence given at his public examination that he worked 70 hours per week. He suggested that that answer, given on 22 March 2000 was referable to a different time period than that encompassed in CAP1.
66. Further, the respondent had erroneously made the assumption that such work was for the farm or for Chelmscliff when the reality was that he spent considerable time responding “to the tirade of bankruptcy related matters”.
67. In the latter part of the CAP1 he spent very little time attending to the farm. From mid November 1998 until June 1999 he did not draw wages from Chelmscliff in return for non productive time in respect of which he had already been paid. Although he disclosed in his statement of affairs at the time of his bankruptcy that he was employed as a farm hand on a gross weekly salary of $450, the respondent failed to recognise that such a figure was only an estimate of likely future earnings and was not meant to be definitive.
68. The applicant contends that the only income which can be attributed to him is $9,446.69 or $9,987.50 as such an amount is consistent with the Sugar Industry Award and was a fair and reasonable remuneration for the amount of work he performed for Chelmscliff during CAP1.
69. In respect to legal expense benefits, the applicant does not dispute that third parties paid legal expenses amounting to $50,576.50. However, he contends that the value to him of benefits provided by Mr Bennett is $17,883.71.
70. He argued that much of the legal expenses incurred were done so without his knowledge or were in respect to matters over which he had no control. These costs including defending an action initiated by John L Sherry, which failed. The former trustees, Philip Jefferson and Jefferson Stevenson & Co were lacking in responsibility and prudence in administering his estate and their actions resulted in considerable charges in respect of which he received no benefit. He based the absence of benefit on the basis that their actions failed to give him the relief he sought.
71. He pointed out that in some instances, Mr Bennett had acknowledged that there were other parties who benefited from his services apart from the applicant.
72. He stated at para 5 of his written submissions:
“I further contend that it is unreasonable, unjust and not encompassed within the intention of the relevant sections of the Act, that the bankrupt be assessed an income contribution on the cost of responding to actions brought against him and which failed or of which he had no knowledge or control over…”
73. In respect to the services performed by Hickman and Associates, he had no knowledge that the services were being performed as he did not instruct Mr Hickman to act on his behalf, however he “may have requested Mr Hickman’s assistance only on a couple of occasions” (page 15 of submissions). He pointed out that he had received no bill from Hickman and Associates for its services and that Mr Hickman had indicated that he did not expect to be paid for his time.
74. Evidence had also been given about the imprecise nature of Mr Hickman’s time records with the result that there was insufficient evidence that Hickman and Associates had provided services to the applicant which could be regarded as benefiting the applicant. This was the original position of the respondent and it should prevail.
75. At the conclusion of his submissions, the applicant suggested that the respondent’s counsel had a conflict of interest in that he had previously represented Sherry, who is a creditor in his bankruptcy. He also raised the suggestion that Sherry may have underwritten the Inspector General in Bankruptcy’s costs in the present action. Mr McQuade took issue with this insinuation and rightly so. It was unfortunate that the applicant chose to raise his concern at the close of evidence. However, I am satisfied that his assertions are baseless and completely lacking in merit. I indicated such to be the case at hearing.
The Respondent
76. The respondent submitted that amendments to the Act in December 1996 effectively provide that an original assessment and a fresh assessment of income derived by the bankrupt during a contribution period may be made after the expiry of the contribution assessment period.
77. The income deemed to have been derived from the applicant’s farming activities is $30,000 or alternatively $23,400. Evidence given by the applicant at his public examination was that management positions in the sugar industry are remunerated at around $30,000 per year. The annual figure of $23,400 is calculated on the basis of a weekly wage stated to have been received by the applicant for the period 9 October 1998 to 18 November 1998.
78. Whilst the applicant contends that he received an income for only part of the contribution assessment period, the circumstances surrounding his employment should be viewed in their totality. The applicant had been the part owner and sole operator of the Seaforth farm prior to entering into an agreement to sell his share of the farm to Chelmscliff as Trustee. However, he remained on the farm in a capacity of operator/manager.
79. In his statement of affairs filed at the time of his bankruptcy the applicant disclosed he was employed by Chelmscliff as a farm hand receiving a weekly salary of $450 and estimated his gross income for the twelve months following bankruptcy at $23,400. In the questionnaire (completed on 21 December 1999 (T5 page 30) he stated he was employed as a farm manager.
80. The applicant’s evidence was to the effect that his role within the farm changed subsequent to the transfer to Chelmscliff. This is inconsistent with his evidence at his public examination in which he stated that he was working 70 hours a week before and after its transfer to Chelmscliff. The evidence reveals that the applicant was involved in extensive administrative tasks, and was clearly in a position of some authority.
81. In the alternative, the respondent contended that the applicant’s wage records, completed by him, reveal $9,987.50 was received during the contribution assessment period. It urged the Tribunal to reject the applicant’s evidence that for a period of about nine months he lived only on income earned during the eight-week period 28 September 1998 to 18 November 1998. The respondent put various alternative propositions in regard to the assessment of the applicant’s income from his work with Chelmscliff.
82. In relation to the benefits received by the applicant, the term “benefit” includes those which fall within that description pursuant to the Fringe Benefits Act. The definition is couched in sufficiently wide terms to encompass the provision of legal and accounting services. Additionally, sections 20 and 144 of the Fringe Benefits Act reinforce the respondent’s view that the legal fees of Messrs Bennett and Philp in the sum of $54,940.55, paid by other persons or entities, should be included as a component of the applicant’s income.
83. Similarly, the accounting services of Hickman and Associates, the value of which has been calculated in the sum of $53,350.90 should be included as income of the applicant.
84. The value of Hickman and Associates’ services have been calculated on the basis of a printout of time entries for services recorded by that firm in the name of the applicant. Mr Hickman’s office had separate codes for associated corporate entities. Whether or not Mr Hickman expected to be paid for his services is irrelevant for the purposes of determining if a benefit was provided.
Consideration
85. In considering what findings I should make arising from the evidence, I am entitled to have regard to the credibility of the witnesses who provided such evidence. The applicant impressed me as an intelligent and shrewd businessman. As to his demeanour, I consider the manner in which he gave evidence was evasive, self-serving and lacking in credibility. On many occasions he prevaricated in providing answers to questions on matters which were not in dispute.
Issue 1
86. I have considered subsection 139W(1) and (2) in their original form and after their amendment in December 1996. Challen v Bendeich [1999] FCA 845 is authority for the proposition that prior to the December 1996 amendments, there was no authority for issuing an original assessment in respect to a contribution period after the expiry of the contribution period.
87. The 1996 amendments made it clear that that a trustee will be able to make an assessment of the bankrupt’s income for a contribution assessment period, which has come to an end because of the discharge of the bankrupt. Challenv Bendeich expressly refrained from expressing a view as to whether the effect of the amendment would permit an original assessment with respect to the contribution period being made after the expiry of that period.
88. One view is that the insertion of the words “or was derived” in subsection 139W(1) implies a retrospective assessment of income derived. It is hard to envisage a situation where in all cases it would be possible to include all income that “was derived” during the course of the contribution assessment period. I consider that the words “was derived” in combination with the words “likely to be derived” suggest that the amendment was meant to enable an assessment outside the contribution period.
89. Having regard to the fact that the amendment was introduced to ensure that those discharged from bankruptcy did not escape their liability to make contributions if it was found that their income exceeded the threshold, it follows that it makes little sense to then interpret the provision in a restrictive manner so as to permit a person who may have earned considerable income during a particular period, unknown to the trustee during that period but discovered subsequently, to escape liability for a contribution. In such cases, the trustee would not, during the contribution period, have any reason for thinking that income in excess of the threshold amount “was likely to be derived” and would not produce a notice on that basis.
90. Whilst it was said by the applicant that this interpretation was incompatible with the directive that the assessment should occur “as soon as practicable after the start of each contribution period”, there will be some cases where the assessment process can only be determined after the assessment period, in which case for all intents and purposes it has been carried out “as soon as practicable”.
91. I find that the original assessment was made validly in accordance with subsection 139W(1) of the Act. It follows that the fresh assessment has been validly made under subsection 139W(2) of the Act.
Issue 2
92. I find the documents produced by the applicant relating to his employment with Chelmscliff clearly demonstrate that he had considerable ongoing involvement in the management of the Seaforth farm.
93. Whilst he sought to explain the meaning of the various documentation which he authored as an employee merely acting on instructions, the authoritative nature of his statements and the intricate discussions of financial arrangements for the company, leave me in no doubt that he was intensively involved in the farm’s management throughout CAP1.
94. His description of his employment as farm manager and farmhand, to my mind underestimate the extent of his involvement in Chelmscliff. His evidence in this forum indicated considerable reluctance to concede he was acting in the position of farm manager. His evidence at his public examination in 2000 was clearly referable to work he carried out on the farm and I reject his evidence that it was of a sporadic nature.
95. I find that he displayed a level of expertise, at the very least, commensurate with an experienced farm manager. Whilst the group certificates completed by the applicant reveal a very low level of income was derived by him, I am satisfied that this is considerably less than what he could have reasonably been expected to have received, when applying the principles under section 139Y of the Act.
96. I reject his evidence that he did not work for long periods and that his income should be assessed on the basis he was a part time employee. The evidence given at his public examination and his ongoing level of responsibility in farm management supports the finding that he would have been reasonably expected to have received at the very least the award rate for that occupation, namely $30,000 and I find that that amount should be regarded as income received during CAP1.
Issue 3
97. In respect to the legal fees, the applicant’s position is that he received no benefit from their payment or at least that he was not the primary beneficiary of the services.
98. Firstly, I find that the applicant incurred the legal expenses in that the work carried out by Bennett and Philp was carried out at his instructions. It is trite to say that the applicant was not aware that certain telephone calls were made between Mr Bennett and other solicitors. The incontrovertible evidence is that the legal services involving communications with Philip Jefferson, Jefferson Stevenson & Co, and John L Sherry’s solicitors comprised work which was carried out on the applicant’s behalf.
99. In particular, the fact that the applicant incurred costs in defending an action instituted by John Sherry, is clearly a matter from which he benefited.
100. It matters not that he was unsuccessful in defending the action or that the outcome was not as he would have liked, the benefit derives from the fact that he instructed Mr Bennett to represent him. Similarly, work involved in section 73 composition proposals benefited the applicant in that, had they been successful, the applicant may not have considered it necessary to declare himself bankrupt.
101. Mr Bennett’s evidence demonstrated clearly that the accounts for other entities were kept quite separate from the account of the applicant. He required him to sign a client services agreement and the services he provided for Mr Dunwoody were in relation to services which he asked to be provided.
102. I have had regard to the applicant’s contention that he benefited from the provision of legal services to a lesser degree. However, I find that the manner in which he assessed who benefited from Mr Bennett’s services to be arbitrary and unconvincing. For example, his argument that he should not be responsible for phone calls between parties entirely misses the point that regardless of who instituted the call, its purpose was to deal with his legal affairs.
103. It is in not in dispute that other parties (providers) made payments to Bennett and Philp. I find such payments were made to discharge the obligation of Mr Dunwoody. Applying section 20 of the Fringe Benefits Act, such payments to Bennett and Philp are taken to constitute the provision of a benefit by the providers to Mr Dunwoody.
104. I find that the sum of $50,576.05 constitutes income derived by the applicant for CAP1.
Issue 4
105. The Official Trustee’s assessment was that the value of services provided by Hickman and Associates at no cost was in the sum of $53,340.09. I am satisfied that this amount is correctly calculated in that the sum was assessed by the hourly charge rates of various staff at Hickman and Associates.
106. The issue then becomes who received the benefit of such services? The applicant did not dispute that the services had been provided, however he disputed that he derived benefit from them.
107. Mr Hickman asserted repeatedly during his evidence that his records were deficient and that it was likely that much of the work was carried out for other entities. He suggested that his office records were totally unreliable in that regard. The inference was that as he was not expecting to be paid for such services, he did not keep an accurate record. However, bearing in mind he issued bills to those other entities, it is unlikely that he would not have kept an accurate record of the transactions he incurred on behalf of Mr Dunwoody. If, as he says, he “lumped it all together”, then he was depriving himself of recouping costs for services from entities that were in a position to pay him.
108. Certainly, he had provided bills to Bechrose.
109. Mr Hickman is an accountant - a professionally qualified person who has operated his own accounting practice for number of years. He employs a number of persons to assist him. He has held directorships in private companies. He is an astute businessman. I totally reject his attempt to portray himself as naive when it comes to costing matters, and his business as disorganised. I reject his evidence in its entirety as unreliable. He was evasive and unconvincing, particularly when giving answers to the most non-contentious of questions.
110. I am satisfied that on each occasion the initials DJW were placed on the costings sheets held by Hickman and Associates that it represented work carried out for the applicant’s benefit. It does not matter that the precise nature of each transaction cannot be identified.
111. That being the case, I find that the sum of $53,340.90 is to be assessed as income.
Summary
112. I set aside the decision review and substitute the Tribunal’s decision that the following amounts should be regarded as income for the purposes of calculating the applicant’s contribution during CAP1:
§Gross Income $30,000.00
§Legal Expenses $50, 576.05
§Accountancy Expenses $53,340.90
113. I have not calculated the contribution amount, as such matters as Medicare levy, income tax and other considerations to be taken into account.
I certify that the 113 preceding paragraphs are a true copy of the reasons for the decision herein of Ms J Cowdroy, Member
Signed: Sarah Oliver
AssociateDates of Hearing 4 and 5 December 2002 and 24 January 2003
Date of Decision 17 December 2003The Applicant appeared in person
Counsel for the Respondent Mr P McQuade
Solicitor for the Respondent Australian Government Solicitor
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