Frost and Inspector-General in Bankruptcy
[2004] AATA 114
•6 February 2004
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2004] AATA 114
ADMINISTRATIVE APPEALS TRIBUNAL )
) No S2002/403
GENERAL ADMINISTRATIVE DIVISION ) Re ALLEN GORDON FROST Applicant
And
INSPECTOR-GENERAL IN BANKRUPTCY
Respondent
DECISION
Tribunal Senior Member WJF Purcell Date6 February 2004
PlaceAdelaide
Decision The Tribunal affirms the decision under review.
(Signed)
WJF PURCELL
(Senior Member)
CATCHWORDS
BANKRUPTCY – contribution assessments – reasonable amount of remuneration in respect of employment – difficulty obtaining information – incomplete and unhelpful information provided –earnings below income threshold – depressive illness – decision affirmed
Bankruptcy Act 1966 sections 139S, 139Y, 139ZD
Re Nelson and Inspector-General in Bankruptcy 35 ALD 113
REASONS FOR DECISION
6 February 2004 Senior Member WJF Purcell 1. This is an application for review of a decision of the respondent (the Inspector-General) of 4 October 2002, which set aside the decision of the applicant’s Trustee in Bankruptcy (the Trustee), and made fresh contribution assessments for the periods 4 September 2000 to 3 September 2001, and 4 September 2001 to 3 September 2002. The Inspector-General made fresh assessments, for both periods, of assessed income, of $36,000, and contribution liability of $1,692.80.
2. The evidence before the Tribunal comprised the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act1975 (the T Documents) together with exhibits tendered by the parties. Mr Riggall represented the applicant, who gave oral evidence. Mr Linden represented the Inspector-General, and called Mr Michael Barr from the Office of the Inspector-General, and Mr John Sheahan, the applicant’s Trustee in Bankruptcy, as witnesses. Mr Sheahan gave evidence by way of telephone link up.
3. The applicant, who had been a practising accountant since 1980, was involved in unsuccessful litigation in the Supreme Court of South Australia in 1997 and 1999, and in the High Court of Australia in July 2000. As a result of the litigation, the applicant became bankrupt under a Sequestration Order on 4 September 2000. Mr Sheahan (the Trustee) became trustee of the applicant’s bankrupt estate. The applicant filed his Statement of Affairs with the Official Receiver on 29 June 2001.
4. On 1 March 2002 the Trustee made contribution assessments for the periods 4 September 2000 to 3 September 2001 (1st assessment period), and 4 September 2001 to 3 September 2002 (2nd assessment period). The Trustee assessed the applicant’s gross income at $80,000 for each of the assessment periods, pursuant to the Bankruptcy Act1966 (the Act). Section 139S of the Act provides:
“139S Contribution payable by bankrupt
The contribution that a bankrupt is liable to pay in respect of a contribution assessment period is the amount worked out in accordance with the formula:
Assessed income - Actual income threshold amount
2
where:
Assessed income means the amount assessed by the trustee to be the income that the bankrupt is likely to derive, or derived, during the contribution assessment period;
Actual income threshold amount means the actual income threshold amount assessed by the trustee to be applicable in relation to the bankrupt when the assessment is made.”
5. Section 139Y of the Act provides:
“139Y Trustee may regard bankrupt as receiving reasonable remuneration
(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.”
6. The Trustee determined, pursuant to s 139Y of the Act, that the amount of a bankrupt’s remuneration in respect of employment, was the reasonable amount of remuneration that the Trustee expected him to receive in respect of his/her employment, work or activities, instead of the actual remuneration. He assessed the applicant’s gross income at $80,000; the total assessed income for the lst assessment period at $53,820.00, less the actual income threshold amount of $30,530.50, resulting in excess income of $23,289.50. The Trustee assessed the required contribution for the lst assessment period at $11,644.75.
7. For the 2nd assessment period the Trustee assessed the total assessed income at $53,820, less the actual income threshold amount of $31,176.60, resulting in excess income of $22,643.40. The Trustee assessed the required contribution for the 2nd assessment period at $11,321.70.
8. On 6 August 2002 the applicant applied to the Inspector-General for a review of the income contribution assessments made by the Trustee. On 4 October the Inspector-General set aside the Trustee’s assessments for both periods, and made fresh assessments pursuant to s 139ZD(b) of the Act, which provides:
“139ZD Decision on review
On a review of a decision, the Inspector-General has all the powers of the trustee and may either:
(a) confirm the decision; or
(b)set aside the decision and make a fresh assessment under subsection 139W(2).”
9. The Inspector-General assessed the applicant’s income pursuant to s 139Y of the Act, but at the lower amount of $36,000, for each of the assessment periods. The Inspector-General assessed the required contribution at $1,692.80 for each of the assessment periods. The applicant has applied to this Tribunal for review of the Inspector-General’s assessment.
10. The applicant maintains that the Inspector-General has not made an assessment within the meaning of the Act. He made a compromise assessment without any, or at least adequate, investigation. He had in his possession a sound profile of the applicant’s practice and professional income, from documents prepared long before this action had become an issue. There was ample evidence before the Inspector-General, to enable him to determine that it was manifestly clear that the applicant was never earning the income asserted by the Trustee, and the Inspector- General ought not to have used the bold concept of a Central Business District practitioner, with 3-4 employees, earning $60-80,000 per year, as a starting point. The applicant maintains also, that on any view, his earnings were below the income threshold, and indeed had been even before his present troubles, and that it is appropriate for the Tribunal to assess his income in the amounts disclosed in his tax returns.
11. The Inspector-General contends that the estimate of assessed income of $36,000 is reasonable in the circumstances of the matter; and that the applicant, although asserting that the method was flawed, has not provided evidence that would enable a better comparison to be done. The applicant, whilst conceding that he has the responsibility of supervising the practice in general terms, has made vague assertions about his working hours and responsibilities. The Inspector-General made assessments on the assumption that the applicant could work 3 days per week during the assessment periods, and has thus accepted some reduction in the applicant’s capacity to work in the practice, but maintains that the applicant’s statement about his working hours, and his level of income, are inconsistent and cannot be relied upon.
12. The applicant gave lengthy oral evidence. He was not an impressive witness. He seemed to find it almost impossible to provide a direct answer to even the simplest of questions. One could speculate as to whether this was due to the depression the psychiatrist, Dr Dare, has reported upon, or to a deliberate attempt to “muddy the waters” and to evade answers. In any event, I consider some of his evidence evasive and unhelpful in relation to the central question in this matter as to what would a hypothetical similar person in the same role be reasonably expected to earn. As Deputy President McMahon said in the matter of Re Nelson and Inspector-General in Bankruptcy 35 ALD 113 at 117 paragraph 21:
“(21) Section 139Y(1)(b) draws a distinction between what might reasonably be expected to be or to have been received by “the bankrupt” in subpara (i), and what might reasonably be expected to be or to have been received by “a person” in subpara (ii). The second subparagraph therefore does not necessarily refer to the bankrupt but refers to a hypothetical person engaged in similar employment, work, or activities in an arm’s length situation. In my view, however, it is necessary to pay some regard to the particular circumstances of the bankrupt in order that the expectation can be seen to be reasonable. One can not ignore the fact that the applicant is an undischarged bankrupt, that he is aged 58, that he has unsuccessfully sought other employment and that he is precluded from engaging in some of the ordinary concomitants of his employment as a law clerk. Some of these aspects must colour the nature of “similar employment, work, or activities”.. Not only will the duties vary in different cases, but the similarity of the activities or work will vary by reference to the personal circumstances of the person concerned.”
13. The applicant gave evidence that the practice operates from commercial premises at 252 Angas Street, Adelaide, which is owned by Ambrose Baker Holdings Pty Ltd, the trustee of the Frost Family Trust.. There are 5 employees - the applicant and 2 full-time tax agents in their late 50’s, a part-time accountant aged 38 (she is also a registered tax agent), and a full-time secretary. The applicant said his tax agent registration was cancelled on 5 June 2001, and he needs other tax agents in the practice to deal with the workload of the remaining clients. He said in evidence that in 1997, before the Supreme Court trial, the practice employed 1 full-time, and 1 part-time accountant, and a secretary, for 20-25 hours per week. He himself was working full-time also. His personal earnings between 1994/95 and 1996/97 were as follows:
1994/95 $21,794
1995/96 $30,1751996/97 $33,933
14. A perusal of T19/121 discloses that when he lodged a Statement of Financial Position with Darren Meers of the ANZ Bank on 18 September 1997, in support of his application for a loan of $191,000 to purchase a unit at Cullen Bay, Northern Territories, he stated that his gross monthly salary was $2,805 or $33,660 per annum. He declared receipt also of rent from commercial premises, of $2,500 per month, or $30,000 per annum, with fixed commitments leaving an uncommitted monthly income of $1,677 per month, or $20,124 per annum. It was not until 9 February 2001 that the Trustee became aware of the existence of the Cullen Bay unit. The Trustee took control then, of the rental income of about $4,000 per quarter, or $16,000 per annum.
15. The applicant gave evidence also, that in 1997 the practice’s gross income was $175,000. It was a fairly small practice with purely taxation work for private individuals or small businesses. The practice paid fairly low wages – the full-time accountant was paid $55-60,000 per annum, the part-time non-qualified, but fairly experienced book-keeper received $18-20,000 per annum, but required constant supervision. The applicant carried the majority of the workload and brought in a large proportion of the practice’s income, around $70,000. From 1997 onwards the applicant says he expended most of his energies in fighting the Supreme Court action, the subsequent Full Court appeal, and finally the High Court Appeal finalised on 7 August 2000. All his former staff moved then to other firms.
16. The applicant said in evidence that the Supreme Court judgment ruined his reputation, and his ability to gain new clients. He lost his tax agent registration, with the effect of the judgment being that he was never to be readmitted. He said that the bankruptcy in September 2000 upset him, because he thought “they would not go ahead with it”.. He has lost interest in activities, has lost social contact with former friends, and has almost no social life. It has affected his marriage, and he and his wife are now separated. He occupies a room in a friend’s home, spends evenings in the practice’s office where he has a couch, a television set, video and stereo, but spends only 1-2 days working in the practice.
17. The applicant gave evidence that between 2000 and 2002 he has worked 6-8 hours per week. He brings in about $20,000 in fees. The practice’s income remains at about $175,000. Before the bankruptcy there were 700-800 clients, now numbered in the 100’s. Those who are former clients seem happy with the arrangement that they deal with the tax agents, and not with the applicant. They see him as the principal of the firm. He said that as at September 2000 he was expecting his drawings to be $25,000 [Exhibit R3]. In his Statement of Affairs dated 23 September 2000, he stated that his income for the previous 12 months had been $10,000. He said that he had no books or records of his income. The books of the practice are controlled by his wife. In May 2002 he completed an income questionnaire, and stated that his income in the previous year was $10,000, and in the current year was also $10,000.
18. The applicant said in evidence that on 3 January 2001 he consulted Dr Dare, Psychiatrist, who diagnosed a major depressive disorder. Dr Dare did not prescribe any medication, but advised the applicant to go for walks, or a ride on his bike when he felt depressed. Dr Dare reported on 21 November 2002 that he reviewed the applicant on 1 November 2002, and that the applicant continued to present with a major depression; that the applicant said that he works about 1 to 2 days a week, and during this time he does only simple tasks; that he has lost interest in his work and his life in general; that he says that he is very irritable and at times, extremely angry, and he wastes time. Dr Dare reported also, that the applicant told him that to help his depression he is trying to walk a lot and do bike riding. At work when he gets frustrated he leaves the office and goes for a drive. On 2 June 2003 [Exhibit A1] he reported that the applicant’s major depressive disorder had reduced his capacity to work. As at the date of his report of 21 November 2002, it was nearly 2 years since Dr Dare had first diagnosed the applicant as suffering from a major depressive disorder, but on the applicant’s evidence, at no time has Dr Dare prescribed medication nor any other form of treatment for this serious condition.
19. Mr Barr, the Decision Maker in this matter, said in evidence that he considered the level of fees the applicant received prior to June 1997 was not relevant. He tried to find out what the applicant was earning, this proved to be difficult, as he was unable to get any evidence from anyone as to the hours the applicant worked. He said that he could not get specific information to rely upon, nor could he ascertain the relationship between the applicant and the employer, the Trustee for the Management Trust. He said that he accepts that a person suffering from a depressive illness would be less capable and would command a lesser salary. This acceptance is reflected in the letter to the applicant advising of the Inspector-General’s decision. The letter advised that the Inspector-General was satisfied that the applicant’s services to the practice were worth, at least, $60,000, and upon the assumption that the applicant worked 3 days per week the Inspector-General determined that the applicant’s reasonable remuneration was $36,000, calculated on the basis of 60 percent of an annual salary. The Actual Income Threshold amount of $32,614.40 was deducted, leaving a balance of income, for contribution purposes, of $3,385.60, a contribution for each period of $1,692.80. I accept Mr Barr’s evidence.
20. The Trustee, Mr Sheahan, gave evidence that he understood that the applicant was an accountant in practice; and that on the basis of his own experience and his informed inquiries as to what profit a practice of similar size to the applicant’s would earn, he assessed the applicant as receiving a reasonable remuneration of $80,000. He said that it “beggars belief” that the applicant would continue to employ people with the responsibilities for such employees for an income in the mid $20,000’s per annum. The applicant would be better off as an employee without the worries, and being paid about $60,000. I accept Mr Sheahan’s evidence.
21. The applicant is clearly a very angry and frustrated man who, despite the passing of some 6 years since the Supreme Court judgment, continues to be embittered by the findings against him, which he believes have ruined his reputation and his career. He appears to have no desire to work hard to earn money to contribute funds, during the course of his bankruptcy. A perusal of the documentary evidence discloses that, to say the least, the applicant has been less than co-operative and forthcoming in his dealings with the Trustee and the Inspector-General. His attitude to the role of the Trustee and the bankruptcy process is understandable from his perspective, but from the point of view of the Trustee and Inspector-General as decision makers, the information the applicant has provided has been unhelpful and incomplete. The Trustee and then the Inspector-General have been forced to do their best with the evidence available.
22. In the course of his submissions, the Inspector-General’s counsel, Mr Linden, said that he was not sure that the evidence available had been substantially improved at the Tribunal Hearing, where, he submitted, we are left with vague assertions about working hours and responsibilities. In my view, the applicant’s evidence and assertions are indeed vague and unconvincing. He maintains that because of his depression, he works 1 to 2 days per week, for a total of 6-8 hours per week. He has sought no psychiatric treatment however for his unremitting major depressive disorder, which has so destroyed his life, and his ability to earn. I am satisfied on the evidence that in all the circumstances of this matter the applicant might reasonably be expected to work 3 days per week.
23. The Inspector-General assessed the appropriate annual income at $60,000; and the applicant’s reasonable remuneration at $36,000, on the basis of his working 3 days. I accept Mr Barr’s evidence and opinion that this is an income that a person might reasonably be expected to earn, if that person was engaged in similar activities to the applicant.
24. I am satisfied on the evidence that the assessed income for the periods 4 September 2000 to 3 September 2001, and 4 September 2001 to 3 September 2002 is $36,000, and that the applicant’s contribution liability for each assessment period is $1,692.80.
25. For these reasons the Tribunal affirms the decision under review.
I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member WJF Purcell
Signed: .......................................................................................
AssociateDates of Hearing 19 & 27 June 2003
Date of Decision 6 February 2004
Counsel for the Applicant Mr D Rigall
Solicitor for the Applicant Mr PA Richardson
Counsel for the Respondent Mr S Linden
Solicitor for the Respondent AGS
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