George Bilios and Inspector-General in Bankruptcy

[2012] AATA 873

Administrative Appeals Tribunal

ADMINISTRATIVE APPEALS TRIBUNAL             )

)        No: 2012/1516

General Administrative Division               )

Re: George Bilios
Applicant

And: Inspector-General in Bankruptcy
Respondent

CORRIGENDUM

TRIBUNAL:             Mr Dean Letcher, QC, Senior Member

DATE:   11 January 2013

PLACE:                  Sydney

The Tribunal directs the Registrar, pursuant to subsection 43AA(1) of the Administrative Appeals Tribunal Act 1975, to alter the text of the decision in this application as follows:

1. Where in the decision summary on the first page and paragraph 31 of the decision currently reads:

(a)In relation to CAP 1 a decision that the Applicant’s Assessed Income is $98,250.70.

(b)In relation to CAP 2 a decision that the Applicant’s Assessed Income is $99,221.71.

(c)In relation to CAP 3 a decision that the Applicant’s Assessed Income is $116,766.36.

The decision shall now read:

(a)In relation to CAP 1 a decision that the Applicant’s Contribution Liability is $98,250.70.

(b)In relation to CAP 2 a decision that the Applicant’s Contribution Liability is $99,221.71.

(c)In relation to CAP 3 a decision that the Applicant’s Contribution Liability is $116,766.36.

...........................[sgd]........................................
Mr Dean Letcher, QC
Senior Member

[2012] AATA 873

Division	GENERAL ADMINISTRATIVE DIVISION
File Number	2012/1516
Re	George Bilios
APPLICANT
And	Inspector-General in Bankruptcy
RESPONDENT

Decision

Tribunal	Mr Dean Letcher, QC, Senior Member
Date	11 December 2012
Place	Sydney

The Tribunal sets aside the decision under review dated 19 March 2012.

The Tribunal substitutes for that decision:

(a) In relation to CAP 1 a decision that the Applicant’s Assessed Income is $98,250.70.

(b) In relation to CAP 2 a decision that the Applicant’s Assessed Income is $99,221.71.

(c) In relation to CAP 3 a decision that the Applicant’s Assessed Income is $116,766.36.

..................................[sgd]......................................

Mr Dean Letcher, QC, Senior Member

Catchwords

BANKRUPTCY – bankrupt's obligation to pay contributions – calculation of assessed income – contribution assessment period – whether calculation of assessed income correct – decision under review set aside and substituted

Legislation

Bankruptcy Act 1996 (Cth) ss 139, 139L, 139K, 139W, 139ZA, 139ZF

Cases

Inspector- General in Bankruptcy v McGushin [2009] FCA 662

REASONS FOR DECISION

Mr Dean Letcher, QC, Senior Member

11 December 2012

Background

1. Dr George Bilios is a general practitioner doctor who has worked at the same medical centre continuously since 1993. On 23 May 2008 he was made bankrupt, but he continued in his medical practice during and after the period of bankruptcy, which ended on 23 May 2011. During the three years of 2005 – 2007 before bankruptcy, he earned over $500,000 each year, but in the three years of bankruptcy he says that his earnings were only an agreed salary of about $180,000 per year.

2. The medical centre was owned by a company Emergency Medical Group (“EMG”), the equal shareholders of which were five doctors’ practice companies including Dr Bilios’ G Bilios Medical Pty Ltd (“GBM”).

3. The commercial arrangements were that each of the five received 80 per cent of their individual gross billings. The residual 20 per cent was used to pay for the services of other doctors working under contract or other expenses of EMG or, if there were a surplus, it was paid out in fortnightly payments equally to the five shareholders’ companies. This system continued during Dr Bilios’ bankruptcy.

   Legislative Framework

4. Under s 139 of the Bankruptcy Act 1966 (“the Act”) a bankrupt is obliged to pay contributions to his trustee for the benefit of his creditors from his earnings. The trustee uses a statutory formula to assess the amount:

   ‘A’ minus ‘B’ divided by 2

   Where ‘A’ = Assessed Income and ‘B’ = Actual Income Threshold Amount.

5. “Assessed Income” under s 139 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. The amount of ‘B’ is defined in s 139K as a particular dollar amount which changes from time to time. It is based on the highest rate of social security payment applicable to the person.

6. Dr Bilios’ trustee made an assessment of the contribution over the three year bankruptcy period of $167,713.34 using the formula and the doctor objected that it was excessive. He sought review under s 139ZA of the Act by the Inspector-General of Bankruptcy. However the review resulted in a great increase in the figure of “Assessed Income”. The reviewer did not accept that Dr Bilios had earned only the $180,000 said to be salary. There was an assessment of contribution on 19 March 2012 of $531,347.54. From that decision Dr Bilios seeks review by the Tribunal.

   The issue for the Tribunal

7. Very shortly before the Tribunal hearing, the Respondent Inspector-General served documents indicating that the claim had been further reviewed by him and that the claim was now $223,605.78. Although this was unexpected, the parties elected to proceed with the hearing on the basis that there was a clear dispute about the basis of calculation, namely the method and criteria for determining “Assessed Income”. The Respondent conceded that the decision of 19 March 2012 should be set aside and sought that the new figure be substituted.

8. It was the Applicant’s contention that the doctor’s income over the three years of bankruptcy totalled only $540,000, being three years at $180,000 per year, as set out in the GBM annual financial statements as the doctor’s salary. The Respondent’s case is that the doctor’s personal exertion income was substantially in excess of that figure, and should be based on 80 per cent of his gross billings with certain accepted deductions.

   The Applicant’s case

9. Dr Bilios gave evidence that his sole work was as a medical practitioner treating patients, and that the extent of his work had remained much the same between 2005 and 2011. He explained that the main amounts paid by EMG to GBM represented 80 per cent of the amount invoiced by EMG to the patients. To prepare his personal tax returns, he took all his documents to his accountant and was advised on the most tax effective way to characterise the amount GBM received, whether it was declared for tax as medical income, director’s fees, wife’s income, bonus or salary. He accepted the advice offered and signed the returns.

10. Accordingly, this was why his tax returns showed:

Year	George Bilios	Includes	Mrs Bilios
2005	$511,554	n/a
2006	$617,222	$433,190 salary + Director’s fee $184,042	n/a
2007	$611,567	$284,527 salary + Director’s fee $327,040	$21,713
2008	$394,685	$110,000 salary + Bonus $284,685	$110,000
2009	$180,000	$85,000
2010	$180,000	$158,785
2011 (1/7/10- 24/5/11)	GBM 80% $357,677

1. The salary of $110,000 in year ended 2008 covered the period in bankruptcy of 23 May 2008 to 30 June 2008.

2. There were no tax returns for year ended 2011 for Dr and Mrs Bilios.

3. In relation to each tax return, Dr Bilios could not recall why substantial sums were characterised as director’s fees or bonus. He agreed that his accountant produced the figures and he signed the returns relying on the advice but not knowing the reasons for the advice. He agreed that his personal tax returns showed “not what happened in the real world”, but what was decided between himself, his accountant and his wife.

4. He said that he met his accountant during the bankruptcy period and took his advice about how the medical fees received should be structured. He said he knew his salary was to be “around $180,000”. He did not know of any written agreement between himself and GBM, nor of any relevant minutes of GBM. When asked if there were any negotiations between himself and his wife (the only director and shareholder of GBM) about salary, his reply was:

   “Not very heavy duty…I would say not.”

5. He agreed that in the bankruptcy period his tax returns were structured to produce the best result for him. He said: “Yes. Absolutely”.

6. The system of payment was that EMG provided a “recipient–created tax invoice” to GBM showing the 80 per cent of medical fees invoiced to patients by EMG relating to Dr Bilios’ attendances. Additionally, on the document was a figure shown as ‘Marketing/Administration’ which bore no relationship to the fees figure. It had nothing to do with marketing or administration. It represented the cash surplus or shortfall of EMG’s current operations.

7. Dr Bilios said that he or his wife checked the fees figure against his own records. There was no explanation of how this was done. If there was no discrepancy, they sent the form back to EMG, which then transferred the final amount to GBM’s bank account.

8. With one immaterial exception, the income of GBM came exclusively in that fashion from EMG. Payments from the GBM account were made only for tax liabilities, accountancy fees and to the George Bilios Overdraft Account (“the GB account”).

9. That account was referred to by the Applicant as ‘the joint account’ but it was in the sole name of Dr Bilios, although Mrs Bilios was able to draw from it. The statements on that account do not show any regular receipts of amounts referable to a weekly or monthly proportion of a supposed salary of $180,000 per annum. The GBM statements similarly do not show regular transfers of proportional amounts to the GB account. The transfers are of substantial amounts intermittently.

10. The Applicant in his statement and evidence asserted that there was an arrangement between himself and GBM that he should be paid a salary of $180,000, plus superannuation, and this continued during the three years of bankruptcy. Other evidence supporting that arrangement came from the accountant, the PAYG sheets (signed by the Applicant), payment of appropriate SGA superannuation amounts and the tax returns of the Applicant and GBM.

    The Respondent’s Case

11. The Respondent’s case was that $180,000 was only part of what Dr Bilios received, that there was no agreement carried into effect that he should be paid only that amount, and that he received greatly more income derived from his personal exertion. The Respondent relied on the absence of any written employment agreement, absence of company minutes, the lack of evidence from the sole director, the size and nature of the transfers from GBM to the GB account and the evidence in cross-examination of Dr Bilios.

    The Findings

12. In the years between 2005 to 2007 the Dr Bilios worked about the same amount as in 2008 to 2011, but received between $500,000 to $600,000 income per year. His evidence was that in 2010, when he had not submitted tax returns for years 2007, 2008 and 2009, he met his accountant who advised him and prepared all those returns and ancillary documents including GBM’s financial reports at that time. It was put to me by Counsel for the Applicant that I should accept that documentary evidence as the factual basis for my decision, rather than ‘speculation’ about what the Applicant might have earned. I have taken into account the Applicant’s evidence about how the figures in those documents were arrived at and in my view the picture is clear that the characterisation of the various figures bore little relationship to reality. They represented a reconstruction of past payments in the most favourable light for the Applicant without regard for actual events– as he agreed in cross-examination. The transactions shown in the GBM and GB account bank statements reflect transfers into his personal account from the GBM account of almost all of the EMG payments, and they appear to have been used for the benefit of the Applicant.

13. The Respondent issued summonses to GBM and the accountant for all documents concerning any employment arrangement between the company and the Applicant and any board minutes of GBM. None was produced. The sole director and shareholder of GBM was the Applicant’s wife. She was not called in evidence to support the story of the annual salary agreement which was otherwise unsupported, except by documents prepared in 2010 in the circumstances described above. I do not accept that there was such an agreement. I find that there was no such agreement.

    Income ‘Derived by the bankrupt’

14. Section 139L defines “income” for the purposes of Division 4B of the Act to be income that is liable to be assessed by the trustee. That income must under s 139W be “likely to be derived, or was derived by the bankrupt during that period.” Section 139K defines “derived” as including amounts “earned, derived or received from any source…”. If a third party receives money as a consequence of work done by a bankrupt, that money is not necessarily “income derived by the bankrupt” for the purposes of s 139W. Indeed, where work is carried out by a bankrupt as an employee, the entitlement to charge for that work is that of the employer, not the employee. In fact, even if the employee were not bankrupt, the right to charge another for the work done is the right of the employer, not the employee.

    Inspector-General in Bankrutpcy v McGushin [2009] FCA 662

15. Dr McGushin was a general practitioner in private practice who became bankrupt. He had obtained his income from his service company which charged his patients. After his bankruptcy, the company paid the doctor a salary. From that salary he made contributions assessed on the salary for the benefit of his creditors. He was entitled to dividends from his company if it had the funds to pay them. His patients paid his company for the doctor’s services amounts greater than the amount needed to cover his salary. The doctor’s trustee in bankruptcy claimed that the doctor’s contribution should be assessed on both his salary and the amounts paid by the patients in excess of his salary because of his right to dividends. It was held by the Administrative Appeals Tribunal, and then the Federal Court, that the company had “derived” the amounts from the patients but the doctor had not.

16. The Applicant relied on this case for the proposition that the money, ultimately received by the Applicant, did not constitute income derived by him, for the reason that it was income derived by the company GBM for the provision of medical services to EMG or its patients.

17. In Dr McGushin’s case, it was certainly held that amounts received by his service company (analogous to GBM) did not fall within the scope of income derived by the doctor. However, the crucial fact in that case was that the company did receive additional amounts of medical fees, but Dr McGushin never received any part of them and never would (because unfortunately there were no funds in the company and it went into liquidation). The essential difference between that case and this is that Dr Bilios received the amounts now claimed to be Assessable Income, and Dr McGushin never did. The Respondent claims to include as Assessable Income only those sums actually received into the GB account, less tax and other consequential deductions. “Derived” in s 139K includes “received”, and the fact is that Dr Bilios received the amounts and Dr McGushin did not.

18. During the three years of bankruptcy, Dr Bilios continued to receive into his personal account payments from GBM, much as he had done before and at a similar rate. Payments from the GB account were for household, family and personal expenses and otherwise for the benefit of the Applicant. The suggested salary of $180,000 plus superannuation did not appear to be relevant to the method, nature or amount of the sums actually received in the Applicant’s account and spent by him or on his behalf.

19. I accept the Respondent’s calculations which are set out in tabular form annexed to the Respondent’s final submissions. They reflect the payments by EGM to GBM and the allowance made to arrive at a figure attributable to the Applicant’s income from personal services for each of the Contribution Assessment Periods (“CAPs 1, 2 and 3”), less the amount already paid by the Applicant. The main issue between the parties was the amount of Assessed Income for each of the periods, and for the reasons set out above I find in favour of the Respondent’s contentions.

    Decision

20. The Tribunal sets aside the decision under review dated 19 March 2012.

21. The Tribunal substitutes for that decision:

    (a)In relation to CAP 1 a decision that the Applicant’s Assessed Income is $98,250.70.

    (b)In relation to CAP 2 a decision that the Applicant’s Assessed Income is $99,221.71.

    (c)In relation to CAP 3 a decision that the Applicant’s Assessed Income is $116,766.36.

I certify that the preceding 31 (thirty -one) paragraphs are a true copy of the reasons for the decision herein of SM Letcher QC.

..........................[sgd]..............................................

Associate

Dated  11 December 2012

Dates of hearing	5 and 6 November 2012
Counsel for the Applicant	B Skinner
Solicitors for the Applicant	ERA Legal
Counsel for the Respondent	S Golledge
Solicitors for the Respondent	Matthews Folbigg Pty Ltd Solicitors