McGushin and Inspector-General in Bankruptcy
[2008] AATA 769
•27 August 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 769
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2007/5057
GENERAL ADMINISTRATIVE DIVISION ) Re MICHAEL McGUSHIN Applicant
And
INSPECTOR-GENERAL IN BANKRUPTCY
Respondent
DECISION
Tribunal Mr S Penglis, Senior Member Date27 August 2008
PlacePerth
Decision 1. The reviewable decision of the respondent made on 14 September 2007 is set aside.
2. The matter is remitted to the respondent to determine the assessed income of the applicant for the assessment period 6 March 2003 to 5 March 2004 in accordance with the Tribunal’s reasons for decision.
...(sgd) Mr S Penglis...............
Senior Member
CATCHWORDS
Bankruptcy – Applicant was the sole income producing employee of a Company of which he held 10/11ths of the issued capital as at the date of his bankruptcy – net income of Company, as distinct from income paid to applicant, not held to be “income … derived by the bankrupt” for the purposes of s 139W of the Bankruptcy Act 1966
LEGISLATION
Bankruptcy Act, 1966 (Cth), ss 139 J, 139 K, 139 L (1), 139 P, 139 Q and 139 W (1)
REASONS FOR DECISION
27 August 2008 Mr S Penglis, Senior Member BACKGROUND
1. The background facts of this matter are not in dispute and thus can conveniently be summarised by drawing from the Statements of Facts and Contentions filed by the parties.
2. The applicant is a medical practitioner. At the time he became bankrupt, he was a director of a company called M K McGushin Pty Ltd (“the Company”) in which he held 10 of the 11 issued shares. His former wife was the other director and held the other issued share in the Company.
3. The Company operated a medical practice. The applicant was the only medical practitioner working for the Company.
4. On 6 March 2003 a sequestration order was made against the applicant.
5. On 21 August 2003 the applicant and his former wife were replaced as directors of the Company by Helena Doyle (the applicant’s wife) and Dr Keith McCallum. The applicant continued to be the only medical practitioner employed by the Company.
6. The Company went into liquidation on 8 December 2003, on or about which date the applicant commenced employment with another company called Harmil Holdings Pty Ltd, the offer of employment with Harmil Holdings Pty Ltd having been signed by Dr McCallum.
7. On 19 November 2003 the applicant’s Trustee in Bankruptcy issued a Notice of Assessment of Contributions for the contribution assessment period 6 March 2003 to 5 March 2004, which decision the applicant requested the respondent to review.
8. By reviewable decision dated 14 September 2007, the respondent set aside the Trustee’s decision and decided in substitution therefor that, in respect of the relevant assessment period, the applicant’s assessed income should be reduced.
9. Although by his initial application to the Tribunal the applicant challenged numerous aspects of the reviewable decision, only three aspects were actually pursued at the hearing, namely the respondent’s assessment that:-
·10/11th’s of the net income of the Company was assessable income by virtue of s 139L (1)(a)(vii) of the Bankruptcy Act 1966 (Cth) (“the Act”);
·the payment of airline tickets by the Company was a fringe benefit which constituted assessable income by virtue of s139L (1)(a)(v) of the Act;
·the payment of membership fees by the Company was a fringe benefit which constituted assessable income by virtue of s139L (1)(a)(v) of the Act.
10. At the hearing before the Tribunal, Ms Oliver, Counsel for the respondent, informed the Tribunal that the respondent conceded the application insofar as it dealt with the issue of membership fees paid by the Company.
11. In accordance with that concession I therefore find that the payment of $4,000 by the Company in respect of membership fees is not assessable income for the purpose of the Act and therefore ought to be excluded by the respondent in its recalculation of the applicant’s contribution assessment.
12. Subsequent to the hearing before the Tribunal, Ms Oliver wrote to the Deputy Registrar advising “that the respondent concedes that the value of the travel expenses should not be included in the applicant’s assessable income for the purposes of calculating his contribution liability in relation to the relevant period”.
13. In accordance with that concession I therefore find that the payment of $3,000 by the Company for airline tickets used by the applicant is not assessable income for the purpose of the Act and therefore ought to be excluded by the respondent in its recalculation of the applicant’s contribution assessment.
THE REVIEWABLE DECISION
14. As to the issue of whether any part of the net profit derived by the Company (excluding therefore the income paid by the Company to the applicant, in respect of which the applicant has been separately assessed by the respondent as assessable income), the respondent’s reasons for decision were as follows.
“There are different methods available to a trustee in bankruptcy under the Act to determine the amount of a bankrupt’s income. Under section 139L (1)(a)(vii), a bankrupt’s income includes:
‘the amount of any money, or the value of any other consideration, received by a person other than the bankrupt from another person as a result of work done or services performed by the bankrupt, less any expenses (other than expenses of a capital nature) necessarily incurred by the first-mentioned person in connection with the work or services’.
In the bankrupt’s case this means that the money earned by M K McGushin Pty Ltd is treated as income of the bankrupt, because the bankrupt provided services for the Company for which the Company was paid, and if the bankrupt ceased employment the Company would be unable to generate little if any income.
According to the ASIC search included in the bankrupt’s affidavit (reference MMI), M K McGushin Pty Ltd had 11 shares on issue, 10 of which were owned by the bankrupt. The portion of M K McGushin Pty Ltd’s net profit attributable to the bankrupt is therefore 10/11th’s or 91%.
Trustee’s assessment
M K McGushin Pty Ltd’s net profit for the year ended 30 June 2003 $135,477
Less tax payable (30%) (40,643)
Net profit after tax 94,834
Portion attributable to bankrupt’s shareholdings (10/11th’s ) $86,158
New Assessment
I have re-calculated the bankrupt’s income under section 139L(1)(a)(vii) using the profit and loss statements of M K McGushin Pty Ltd for the two years ended 30 June 2003 and 30 June 2004, which cover CAP 1.
M K McGushin Pty Ltd’s net profit for year ended 30 June 2003,
from the company’s profit and loss assessment $135,477
Less tax payable (30%) (40,643)
Net profit after tax 94,834
Portion attributable to bankrupt’s shareholdings (10/11th’s ) (a) $86,158
M K McGushin Pty Ltd’s net profit for year ended 30 June 2004,
from the company’s profit and loss assessment $ 33,078
Less tax payable (30%) ( 9,923)
Net profit after tax 23,155
Portion attributable to bankrupt’s shareholdings (10/11th’s ) (b) $21,050
For Cap 1 6 March 2003 to 5 March 2004:
For 6 March 2003 to 30 June 2003 (17 weeks)
$86,213 (a), divided by 52 weeks, multiplied by 17 weeks $28,185
For 1 July 2003 to 5 March 2004 (35 weeks)
$21,050 (b), divided by 52 weeks, multiplied by 35 weeks $14,168
Money received by others resulting from bankrupt’s services or work $42,353”
LEGISLATIVE FRAMEWORK
15. The provisions of the Act relevant to this matter are found in Division 4B of Part VI of the Act, which was introduced by the Bankruptcy Amendment Act and took effect on 1 July 1992.
16. Division 4B introduced into the Act a requirement that a bankrupt contribute a portion of his or her income towards their bankrupt estate.
17. The bankrupt’s liability to pay a contribution in relation to a contribution assessment period arises under sections 139P and 139Q of the Act.
18. The term “contribution assessment period” is defined in section 139K of the Act to mean a period that:
(a)begins on the day the bankrupt becomes a bankrupt or an anniversary of that day during the bankruptcy; and
(b)ends one year after that day or anniversary, as the case requires, or if the bankrupt is discharged or the bankruptcy is annulled within that year, ends upon the discharge or annulment.
19. It was common cause that, in the present case, the relevant contribution assessment period was 6 March 2003 to 5 March 2004.
20. Section 139W (1) of the Act provides as follows:
“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.”
21. Section 139S of the Act provides the formula by which the contribution that a bankrupt is liable to pay in respect of a contribution assessment period is worked out. It is not necessary for the purposes of this decision for that formula to be reproduced.
22. “Income” is defined in section 139L (1) of the Act, for the purposes of Division 4B, as follows:
“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”):
…
(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 the Act but subject to any modifications of any provisions of that Act made by the regulations under this act;
…
(vii)the amount of any money, or the value of any other consideration, received by a person other than the bankrupt from another person as a result of work done or services performed by the bankrupt, less any expenses (other than expenses of a capital nature) necessarily incurred by the first-mentioned person in connection with the work or services; …”
23. The word “derived” is defined by section 139A of the Act to mean, “earned, derived or received from any source whether within or outside Australia”.
THE EVIDENCE
24. Both the applicant and his accountant, Michael Hutson, gave evidence as part of the applicant’s case. The applicant’s evidence-in-chief was to affirm on oath his witness statement dated 20 May 2008, which (insofar as it related to the only issue which now remains in contention) was in the following terms:
“1. I have been practicing as a General Surgeon from 5 January 1988.
2.I was made a bankrupt on 6 March 2003 when a sequestration order was made and Paul Anthony Pattison was appointed the Trustee of my bankrupt estate.
3.Prior to my bankruptcy, I operated a medical practice in Kalgoorlie through a company by the name of M K McGushin Pty Ltd CAN 009 571 644 (“the Company”).
4.I registered the Company on 24 March 1988 and together with my ex-wife Carlynn Maree McGushin were directors of the Company. I own 10/11 of the shares in the Company. I produce a copy of the historical company extract kept by the Australian Securities and Investment Commission as of 29 January 2007 (T150-156).
5.I was the only doctor working in the medical practice, my ex-wife worked there from time to time as a receptionist.
Profit of the Company
6.I have seen a copy of Mr Pattison’s notice of assessment for the assessment period of 6 March 2003 to 5 March 2004 dated 19 November 2003 (T23-29) and also the decision on review of the Inspector General dated 14 September 2007 (T4 to 13). In both of those assessments, profit received by the Company was included as part of my assessable income.
7.I do not consider that very fair. I declared everything I actually received from the Company during the assessment period. I did not receive any distribution of profit from the Company during that period or after. I did not expect to receive any distribution of profit from the Company because the Company was liquidated in December 2003. What every assets the Company had at that time was taken over by the liquidators.
8.When I was operating the Company, I do not have a set salary and the amount I would draw from the Company differs from year to year.
9.I have a fortnightly periodic transfer from the Company’s bank account into my personal BankWest account of $1,478.00. On top of the fortnightly transfers I also transfer lump sums of money from the Company’s bank account into my personal bank account from time to time as and when I needed it. Further I also used the Company’s bank account to pay some of my personal expenses and drew cheques for my personal use.
10.All of the above transactions would be recorded. For example the Company’s bank account statement would show what monies were transferred into my account and the cheque butts would show what cheques were used for my personal purpose.
11.At the end of the financial year, the monies used by me personally would be totalled and that became my income from the Company for that financial year.
12.I do not personally do the accounting, but would send all of the Company’s books and records to my accountant Michael Hutson or Mike Hutson Accountants.
13.I engaged Mr Hutson to do the company’s financial returns and also my personal tax returns from around 1990.
14.After I became a bankrupt, I continued to work in the medical practice and continued to draw an income from the Company in the same way I did before, until the Company was would up in early December 2003.
15.After my bankruptcy, I could not continue to be a director of the Company and new directors were appointed in my stead on or about 20 August 2003. I still retained my share holdings in the Company.
16.On 10 December 2003, administrators were appointed to Company and on 13 January 2004 the same administrators were become liquidators.
17.It was around December 2003 that I left the Company and commenced my employment as a general surgeon with my current employer Harmil Holdings Pty Ltd.
18.I did not withdraw nor receive any further money from the Company after it went into liquidation.
19.As far as I am aware, all monies I did withdraw from the Company were included in my tax return as part of my salary.
20.I did not receive any distribution from the Company after it was wound up. I produce a copy of a letter Mr Hutson received from Sims Partners confirming that. I requested Mr Hutson to contact Sims Partners for that confirmation.”
25. In cross-examination the applicant said that he stayed out of discussions concerning Dr McCallum and the applicant’s wife becoming director’s of the Company, leaving those discussions to his accountant, Mr Hutson. He said that, apart from himself, the only other employees of the Company were two receptionists. He said that he agreed that all income earned by the Company was earned by it directly from the medical services which he provided. He said that when Dr McCallum and his wife were appointed as director’s of the Company, they became signatories to the Company’s bank accounts but that, throughout, he remained a signatory to the Company’s cheque account.
26. The applicant said that he continued to deal with the running of the staff, but any important decisions that had to be made were discussed with Dr McCallum. He said that Dr McCallum was present at the business “infrequently” saying that “he was around the corner, I used to see him in the hospital quite a lot”. When asked how often his wife was present at the Company during normal working hours, the applicant responded “not very often”. When asked whether he had regular meetings with Dr McCallum and his wife about the Company he said ”he used to meet Mr McCallum in the hospital and discuss with him at the time, because we were both busy, and that was the most appropriate time when we’re across in the hospital. I did discuss with my wife but that would have been at home…”. When asked whether anything had changed in the way he worked after Dr McCallum and the aplicant’s wife were appointed directors, the applicant said “I think there was a lot change, I was no longer in charge”.
27. The applicant was not re-examined by his Counsel, Mr Christensen.
28. Mr Hutson gave evidence that he is an experienced accountant operating his own accounting practice in Kalgoorlie since 1995, in which year he was engaged by the applicant as his accountant. He was also the accountant of the Company before the Company was liquidated in December 2003.
29. Mr Hutson’s evidence was to confirm that, during the relevant assessment period, the applicant did not receive a distribution of profit from the Company and to indicate, by reference to the Company’s financial statements, what payments the applicant did in fact receive from the Company by way of income. Mr Hutson was cross-examined by Ms Oliver and re-examined by Mr Christensen. I do not consider any evidence given in cross-examination or re-examination to directly bear on the remaining issue for determination in this matter.
30. Dr McCallum was called to give evidence on behalf of the respondent. Dr McCallum’s witness statement (which was received into evidence) was in the following terms:
“1.Except where otherwise stated, I make this witness statement from my own knowledge.
2.I am a specialist practising in Kalgoorlie. I operate a medical practice Harmil Holdings Pty Ltd, of which I am the sole director.
3.On 20 August 2003, I became a director of M K McGushin Pty Ltd (CAN 009 571 644) (hereinafter referred to as “the company”) with Helena Geraldine Doyle. Sometime prior to 20 August 2003, I was approached by Michael Hutson, an accountant, and asked whether I would be prepared to become a director of that company.
4.I was aware at that time that Michael McGushin had been the medical director of the company and that he had been operating his medical practice through the company. I was also aware that Michael McGushin was the only medical practitioner working in the company at that time.
5.I knew, in August 2003, that Michael McGushin was a bankrupt. I was aware that Michael McGushin had financial difficulties and was to be removed as a director of the company. I knew from my personal experience as a director of my own company that the company required a medical practitioner as a director.
6.After taking advice from Mr Hutson and my lawyer, I agreed to become a director of the company.
7.At the time I became a director of the company, the company employed two secretarial staff – one on a full-time basis and one on a part-time basis. After becoming director of the company, I took over responsibility of all staffing issues.
8.I know that after I became a director of the company, Michael McGushin became an employee of the company. I recall having a discussion with Michael McGushin about fixing his salary as an employee and what would be a reasonable salary based on the company’s earnings.
9.Michael McGushin was the only medical practitioner providing medical services for the company during the time that I was a director of the company.
10.Sarah Oliver of the Australian Government Solicitor informed me on 16 July 2008 that, after I became a director of the company, Michael McGushin continued to draw money from the company accounts and that the total of the drawings were recorded as his income from the company during the period 20 August 2003 and December 2003 (when the company went into administration). I do not agree with this.
11.After I became a director of the company, I took complete control of it and I did not allow Michael McGushin to assess company monies. My recollection is that Michael McGushin was no longer a signatory on the company’s accounts and was paid a fixed salary.
12.I was responsible for the day-to-day management of the company from 21 August 2003 and I had daily discussions with Michael McGushin about the operations of the company. Those discussions often happened at the hospital in Kalgoorlie.
13.I recall that, after I became the director of the company, Michael McGushin did make some day-to-day minor decisions affecting the company in my absence without discussing this with me first, such as hiring plants and ordering stationery.
14.I know that the company changed its name to Kaltown Pty Ltd and went into administration in December 2003. I do not recall the circumstances of the company going into administration, although I know that I acted on advice from Mr Hutson and my lawyers.
15.After the company went into liquidation, I offered Michael McGushin employment through my company, Harmil Holdings Pty Ltd. Attached and marked with the letter “A” is a copy of the offer of employment made to Michael McGushin.
16.Michael McGushin is still currently employed by Harmil Holdings Pty Ltd. He provides medical service on behalf of the Harmil Holdings Pty Ltd at the former premises of the company, M K McGushin Pty Ltd.”
31. Dr McCallum was asked some supplementary questions by Ms Oliver on behalf of the respondent. Mr Christensen did not wish to cross-examine Dr McCallum on his evidence.
32. The supplementary questions put to Dr McCallum by Ms Oliver were in essence an endeavour to impeach some of the respondent’s own witness’s evidence. Dr McCallum was asked whether it was possible that, given the effluction of time since August 2003, he may now be mistaken about the arrangements that were in place at the time. The Doctor said that he remembered “quite clearly” taking advice about whether or not he should become involved with a bankrupt. He said the applicant “had no responsibilities whatsoever with the cheque book, and that took a considerable amount of time to get control of the situation. It didn’t take time, but it took a lot of work to actually get control of it and make the applicant realise that he had no responsibilities in this regard”.
33. The Doctor was told that the applicant’s evidence to the Tribunal was that he continued to be a signatory on the Company’s accounts between August 2003 and December 2003 and that he continued to draw money from the accounts so that those drawings were tallied up and recorded as his salary. Dr McCallum said that is not what he recalled. He said the applicant did get paid by the Company. He said he didn’t remember the applicant being a signatory to the bank account, that he was quite sure that he wasn’t, but that he would “need to go back and find cheque stubbs to – cheques to confirm or disprove that” .
34. It was also put to Dr McCallum that it was possible he was mistaken in his evidence and that what he was recalling was actually the circumstances after the applicant became an employee of Harmil Holdings; a proposition with which Dr McCallum did not agree.
FINDINGS
35. I make the following findings of fact:
·The applicant has practised as a general surgeon since 5 January 1988.
·Prior to being made a bankrupt on 6 March 2003, he operated a medical practice in Kalgoorlie through the Company.
·The Company was registered on 24 March 1988.
·The applicant and his former wife were the sole directors of the Company prior to the applicant’s bankruptcy.
·The applicant owned 10/11 of the shares in the Company, with his former wife owning the remaining share.
·The applicant was the only doctor working in the medical practice.
·The applicant did not have a set salary and the amount he would draw would vary from time to time and year to year.
·In addition to a fortnightly periodic payment transferred from the Company’s bank account to his own bank account, the applicant would transfer lump sums from the Company’s bank account into his personal bank account from time to time as and when it was available and was needed by him. He also used the Company’s bank account to pay some of his personal expenses and drew cheques for his personal use.
·All transactions would be recorded and at the end of the year totalled, with the total becoming the applicant’s income for the financial year.
·When the applicant became bankrupt, he continued to work in the medical practice and to draw an income the same way he did before (including being a signatory to the Company cheque account), albeit until when Dr McCallum was appointed a director of the Company.
·Dr McCallum was appointed a director of the Company on 20 August 2003.
·Administrators were appointed to the Company on 10 December 2003.
·The Administrators were appointed liquidators of the Company on 13 January 2004, at least until when Dr McCallum was appointed a director.
·It was around about the same time that the Company was placed into administration that the applicant ceased to be an employee of the Company and commenced employment as a general surgeon with Harmil Holdings Pty Ltd.
36. It is important to note that there was no suggestion made on behalf of the respondent that the corporate structure established by the applicant for the provision of his medical services, namely through a corporate structure which he and his wife owned, of which he and his wife were the directors and by which he was employed, was either a sham or a device employed by the applicant for the purpose of seeking to avoid the provisions of the Act. The corporate structure was established well before the applicant’s bankruptcy and was unexceptional.
37. In the reviewable decision, the respondent concluded that under section 139L (1)(a)(vii) “a bankrupt’s income includes money received by a person other than the bankrupt from another person as a result of work done or services performed by the bankrupt, less any expenses (other than the expense of a capital nature) necessarily incurred by the first-mentioned person in connection with the work or services.”
38. I find the respondent was in error in doing so. It is true that section 139L(1)(a)(vii) of the Act defines the term “income” to include money received by a third person as a result of work done or services performed by the bankrupt. However, to be the “bankrupt’s income”, and therefore capable of being included in a contribution assessment, section 139W needs to be considered, and a determination made that the “income” was “likely to be derived or was derived by the bankrupt”.
39. The mere fact that a third party receives money as a consequence of work done or services performed by a bankrupt does not mean that it is “income … derived by the bankrupt” for the purposes of section 139W of the Act. During the course of the hearing, Ms Oliver, Counsel for the respondent, rightly conceded this.
40. Accordingly, taking an example given during the course of the hearing by the Tribunal, if a law firm employed a bankrupt legal practitioner, the fee income received by the firm as a consequence of the work performed by the bankrupt legal practitioner is not “income derived by the bankrupt” within the meaning of Section 139W of the Act. It would be absurd to suggest that the net income derived by the law firm from the efforts of its bankrupt employee was income to be included in any calculation of the contribution that the bankrupt is liable to pay under the Act.
41. It was the case for the respondent, however, that on the facts of this case, the amounts received by the Company was “income … derived by the bankrupt” because the Company was the “alter ego” of the applicant. In this regard Ms Oliver submitted the following:
“Well, we say he falls within (section 139W of the Act) because the income of the company was income that he was likely to derive and it could be found that he was likely to derive. There doesn’t appear to have been any limitation on the money he could remove, subject to there being money in the account, to use for his own purposes. He is effect the alter ego – the company is his alter ego: He’s the one earning substantial money for the company. There is no financial benefit to Mr McCallum or Ms Doyle in their roles as directors. Obviously Ms Doyle might have consequential benefits as the wife of Mr McGushin. But in that circumstance he was the person who was likely to derive the benefit of the profits of the company”.
42. When asked to identify the facts which it was submitted bring the matter within section 139W of the Act, Ms Oliver referred to the following:
·The applicant was the sole medical practitioner operating in the practice.
·The applicant’s services earned the Company significant income in the form of consultancy fees.
·The applicant and his former wife were the only 2 directors of the Company.
·There was no evidence of the applicant’s former wife being employed by the Company.
·The applicant was a signatory to the Company’s accounts and drew money from the accounts at will, which amounts were then “tallied up and recorded as his income in the Company’s financial accounts”
·The applicant held 10 of the 11 issued shares in the Company, and therefore controlled it.
43. I accept the submissions advanced on behalf of the respondent insofar as they concerned the facts of the matter. However, I do not accept the submission advanced on behalf of the respondent that those facts meant that the whole or 10/11th’s of the net income of the Company is “income derived by the bankrupt” with in the meaning of section 139W of the Act.
44. The proper analysis is that where work is carried out or services performed by a bankrupt as an employee, the entitlement to charge for those services and thereby derive an income is that of the employer, not of the employee. The legal entitlement to charge for the services provided by the employee is that of the employer. The legal entitlement to receive payment for those services is that of the employer. The employee’s entitlement is no more than an entitlement to be paid by his or her employer for the work done by the employee as its agent.
45. Unless the structure is to be impeached (which is not the position in this case), the aforesaid analysis does not alter merely by reason of the fact that the employee holds some or even all of the shares in the employer company and is also a director of the same.
46. Nor does the analysis alter by reason of the fact of the number of persons employed by the employer company to provide income generating work.
47. It was submitted on behalf of the respondent during the course of the hearing that the combined effect of Sections 139 L (1)(a)(vii) and 139W (1) was to enable the respondent to “lift the corporate veil”. I do not agree. The combined operation of the sections certainly allows the respondent to include as a bankrupt’s income moneys paid to persons other than the bankrupt, but they still require the respondent to undertake a characterisation of those payments and determine whether or not they are “income derived by the bankrupt” as distinct from income derived by a third party. As I have found, moneys paid to an employer for work performed by an employee is income derived by the employer, through its agent. It is not the agent’s income. Nothing in the Act changes that.
48. I also note that, at my request, Counsel for the respondent provided to me, and I have read, the Second Reading speech and extracts from the relevant Explanatory Memorandum for the Bankruptcy Legislation Amendment Act 1996. Nothing in either of those documents contains anything which supports the interpretation of section 139W of the Act contended for on behalf of the respondent.
49. Nor do any of the findings of fact as to the applicant’s dealings with the Company between the dates upon which he was made a bankrupt at least to the date when Dr McCallum was appointed a director of the company affect that analysis.
50. I therefore find that the respondent was in error in including any part of the Company’s net profit in determining the assessable contribution of the applicant and find that, when determining that contribution, the net profit of the Company is not to be taken into account.
51. Whilst that is sufficient to deal with this aspect of the matter, I note for the sake of completeness that if the respondent’s submission was to be accepted, then it must follow that the whole of the net profit would need to be included. An apportionment of the net profit by reference to the employee’s shareholding in the employer company is an exercise that in my opinion cannot be supported by any reading of the relevant sections of the Act. Indeed, during the course of the hearing, counsel for the respondent, rightly in my view, effectively conceded as such.
52. It would appear from the respondent’s reasons for this aspect of the reviewable decision that the respondent effectively recognised, on its own analysis, the odd result thrown up by holding all of the net profit derived by the Company to be included in a determination of the applicant’s assessment contribution when the applicant owned only 10/11th’s of the Company. The respondent’s solution, namely an apportionment of 10/11th’s of the net profit of the Company, is entirely artificial and simply serves to reinforce the conclusion I have reached.
53. I also observe that, if the respondent’s submissions were to be upheld, then a further anomaly arises from the fact that the net profit of the Company is included in the applicant’s assessable income whilst, at the same time, the translation of any net profit into a dividend paid to the shareholders would be available for distribution to the bankrupt’s creditors, the shares held by the applicant in the Company having divested to the applicant’s Trustee in Bankruptcy for the benefit of creditors, upon his bankruptcy.
I certify that the 53 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S Penglis, Senior Member
Signed: (sgd) T Freeman..............
AssociateDate/s of Hearing 19 June 2008 and 29 July 2008
Date of Decision 27 August 2008
Counsel for the Applicant Mr L Christensen
Solicitor for the Applicant Christensen Vaughan
Counsel for the Respondent Ms S Oliver
Solicitor for the Respondent Australian Government Solicitor
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