Sheikholeslami and Inspector-General in Bankruptcy

[2011] AATA 670

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 670

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2011/0859

GENERAL ADMINISTRATIVE DIVISION		)
Re		ROYA SHEIKHOLESLAMI

Applicant

And INSPECTOR-GENERAL IN BANKRUPTCY

Respondent

DECISION

Tribunal Ms J L Redfern, Senior Member  

Date28 September 2011

PlaceSydney

Decision The decision of the Inspector-General is varied and the income contribution liability of Ms Sheikholeslami in respect of her first year of bankruptcy is to be calculated based on the exchange rate applicable at the time of assessment, being 14 February 2011.  

..............................................

J L Redfern
  Senior Member  

CATCHWORDS

Bankruptcy – income contribution assessment – estoppel – exchange rate to be applied when bankrupt has earned income in foreign currency – when foreign income should be converted into Australian dollars for purposes of income contribution assessment – whether conversion at the date of the assessment or at the time income is derived – significant fluctuations in exchange rate – Tribunal finds exchange rate should be applied at the time of the assessment – the decision is varied.

Bankruptcy Amendment Act 1991 (Cth)

Bankruptcy Act 1966 (Cth) Part VI Divs 1, 2 and 4B, ss 139J, 139P, 139Q, 139S, 139W, 139K, 139U, 139V, 139WA, 139ZA, 139ZD, 139ZF, 139T, 82(1), 139N

Social Security Act 1991 (Cth)

Income Tax Assessment Act 1997 (Cth) Sub Div 960-C, s 11.15

Randall v Deputy Commissioner of Taxation [2008] FCA 1939

Re Griffiths 139 FCR 185

REASONS FOR DECISION

28 September 2011            Ms JL Redfern, Senior Member

BACKGROUND

1.      Ms Roya Sheikholeslami became bankrupt on 24 September 2008. She worked as a Professor at the University of Edinburgh in the United Kingdom during her first year of bankruptcy and was paid income in pounds sterling.

2.      On 1 December 2010 her Trustee, Mr Raymond George Tolcher, issued an assessment of the amount Ms Sheikholeslami was required to pay to the Trustee as a contribution for her creditors in respect of her first year of bankruptcy. The amount assessed was AU$6,705.50.

3.      Ms Sheikholeslami sought a review of the assessment by the Inspector-General in Bankruptcy (the Inspector-General) and on 14 February 2011 a delegate of the Inspector-General made a further contribution assessment. In making the assessment, the delegate converted the income received by Ms Sheikholeslami from English pounds sterling to Australian dollars and applied an exchange rate based on the average monthly exchange rate for the period Ms Sheikholeslami received the income.

4.      Ms Sheikholeslami disputes this calculation and contends that the conversion of her income to Australian dollars should be undertaken at the time the contribution is assessed because of recent market volatility. The exchange rate at the time of the assessment was significantly more favourable to Ms Sheikholeslami than the exchange rate that applied at the time she derived the income during her first year of bankruptcy.  Ms Sheikholeslami has applied to the Tribunal for a review of the decision of the Inspector-General.    

ISSUES FOR DETERMINATION

5.        The parties agree that the facts are not in dispute and the key issue for determination is whether, for the purposes of assessing the contribution Ms Sheikholeslami is required to make in respect of her first year of bankruptcy, her income for the period should be converted from pounds sterling to Australian dollars at the exchange rate applying:

(a)at the date of the issue of the contribution assessment by the Inspector-General; or

(b)at the time her income was derived.

6.        Ms Sheikholeslami does not challenge the use of the monthly average exchange rate to calculate her contribution if the relevant time to convert her income is when it was derived, but nonetheless contends there is nothing in the legislation that authorises such methodology and argues this highlights the correctness of her case.

7.        The Inspector-General raised a threshold issue at the hearing, but not in written submissions, which Ms Sheikholeslami rejects. The Inspector-General contends that Ms Sheikholeslami should not now be allowed to take issue with the exchange rate applied by the Inspector-General and the Trustee on the basis that when the Trustee made his first assessment she argued the conversion should be made using the relevant exchange rates at the time her income was derived.  This is said to raise an estoppel, or alternatively, to be a discretionary consideration for the Tribunal.

LEGISLATIVE FRAMEWORK

8.        Prior to the Bankruptcy Amendment Act 1991 (Cth), which came into effect in 1992, a bankrupt was entitled to retain his or her income earned during bankruptcy, subject to the right of a Trustee in bankruptcy to apply to the court for orders requiring a contribution. As a result of the amendments a new Division 4B of Part VI was inserted into the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act), which “sets up the machinery to enable a Trustee of a bankrupt's estate to oblige a bankrupt to make contributions out of the bankrupt's income to the bankrupt's estate” (Lander J in Randall v Deputy Commissioner of Taxation [2008] FCA 1939 at 54).

9. The objects of Division 4B are set out in s 139J and are:

(a)  to require a bankrupt who derives income during the bankruptcy to pay contributions towards the bankrupt's estate; and

(b)  to enable the recovery of certain money and property for the benefit of the bankrupt's estate.

10.      The liability of a bankrupt to pay a contribution is set out in s 139P, which provides:

Liability of bankrupt to pay contribution

(1)  Subject to section 139Q, if the income that a bankrupt is likely to derive during a contribution assessment period as assessed by the trustee under an original assessment exceeds the actual income threshold amount applicable in relation to the bankrupt when that assessment is made, the bankrupt is liable to pay to the Trustee a contribution in respect of that period.

(2)  Subject to section 139Q, if the income that a bankrupt is likely to derive during a contribution assessment period as assessed by the trustee under an original assessment does not exceed the actual income threshold amount applicable in relation to the bankrupt when that assessment is made, the bankrupt is not liable to, but may if he or she so wishes, pay to the trustee a contribution in respect of that period.

[Emphasis added]

11.       Section 139Q deals with the liability of the bankrupt to pay a contribution where there have been subsequent assessments and provides:

Change in liability of bankrupt

(1)  If the income that a bankrupt is likely to derive, or derived, during a contribution assessment period as assessed by the trustee under a subsequent assessment exceeds the actual income threshold amount applicable in relation to the bankrupt when the subsequent assessment is made, the bankrupt is liable to pay to the trustee a contribution in respect of that period.

(2)  The liability of the bankrupt under subsection (1) in respect of a contribution assessment period is in substitution for any liability of the bankrupt in respect of that period under subsection 139P(1) or under any previous application of subsection (1) of this section and has effect despite subsection 139P(2).

(3)  If the income that a bankrupt is likely to derive, or derived, during a contribution assessment period as assessed by the trustee under a subsequent assessment does not exceed the actual income threshold amount applicable in relation to the bankrupt when the subsequent assessment is made:

(a)  the bankrupt is not liable to, but may if he or she so wishes, pay to the trustee a contribution in respect of that income; and

(b)  any liability that the bankrupt had under subsection 139P(1) or under subsection (1) of this section to pay a contribution in respect of that period is extinguished.

[Emphasis added]

12. Section 139S sets out the formula for calculating the contribution payable by the bankrupt as follows:

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.

13. The Trustee is to assess the bankrupt’s income and contribution in accordance with s 139W, which provides:

Assessment of bankrupt's income and contribution

(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.

(2)  If at any time, whether during or after a contribution assessment period, any one or more of the following paragraphs applies or 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;

(b)  the base income threshold amount increased or decreased after the making of the last preceding assessment in respect of that period and before the end of that period;

(c)  the trustee is satisfied that the number of the bankrupt's dependants increased or decreased after the making of the last preceding assessment and before the end 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.

(3)  The powers of the trustee under subsection (2) may be exercised on the trustee's own initiative or at the bankrupt's request, but the trustee is not required to consider whether to exercise those powers at the bankrupt's request unless the bankrupt satisfies the trustee that there are reasonable grounds for the trustee to do so.

(4)  As soon as practicable after the making of an assessment the trustee must give to the bankrupt written notice setting out particulars of the assessment and informing the bankrupt about the possibility of a variation under section 139T.

14.      The “actual income threshold amount” and the “base income threshold amount”, which are relevant to the calculations in ss 139P, 139Q, 139S and 139W, are defined in s 139K and are based on the formulae set out in the section.  The calculation of these amounts is not in dispute.

15.      Relevantly, s 139K provides that “derived” means “earned, derived or received from any source, whether within or outside Australia”.

16.      Section 139U makes provision for the bankrupt to provide evidence of income to the Trustee and 139V gives powers to the Trustee to require the bankrupt to give additional evidence in certain circumstances.

17. The scheme in Division 4B of the Bankruptcy Act therefore operates on the basis that the Trustee is likely to make at least two assessments of the income contribution liability of the bankrupt – one as soon as practicable after the start of the contribution period (”the original assessment”) and one “at any time” if the Trustee is satisfied that the bankrupt’s liability has changed in the circumstances set out in s 139W (2). This is described as a “fresh assessment” in s 139W (2) but would also be “a subsequent assessment” for the purposes of s 139Q. Relevantly, s 139WA provides that there is no time limit on the Trustee making an assessment of the bankrupt’s income contribution.

18.      Section 139ZA provides that the Inspector-General may review a decision of a Trustee to make an assessment on his or her own initiative or at the request of the bankrupt. In conducting a review, the Inspector-General may confirm the decision or set aside the decision and make a fresh decision (s 139ZD). An application may be made to this Tribunal to review a decision by the Inspector-General (s 139ZF).

BACKGROUND FACTS AND SUBMISSIONS OF THE PARTIES

19.      Ms Sheikholeslami was made bankrupt on 24 September 2008 and it is common ground that the first year of bankruptcy was from 24 September 2008 to 23 September 2009. It is also common ground that Ms Sheikholeslami earned income from the University of Edinburgh in the United Kingdom in the sum of £33,006.52 sterling. She has not earned income since this time.

20.      On 15 December 2008, Ms Sheikholeslami’s Trustee in bankruptcy, Mr Raymond Tolcher, assessed her for an income contribution based on the estimated receipt of income £72,500 sterling. He applied an exchange rate, converting pounds sterling into Australian dollars, as at 1 December 2008.

21.      On 14 January 2009 and later, on 9 February 2009, Ms Sheikholeslami requested that the Trustee review his assessment having regard to a number of matters, including fluctuations in the exchange rate. The Trustee made a further assessment on 3 February 2009, again using estimated income in the sum of £72,500 sterling, and advised he would deal with Ms Sheikholeslami’s concerns by making a further reassessment at the end of the first year of bankruptcy using the average monthly exchange rate during that period.

22.      Ms Sheikholeslami applied for reviews by the Inspector-General of both the first and second assessments by the Trustee.  The Inspector-General declined to review the assessments.

23.      On 1 December 2010 the Trustee issued a subsequent income contribution assessment using estimated income of £25,240.28 sterling.  The Trustee based the assessment on the average monthly exchange rates at the commencement and the conclusion of the first year of bankruptcy.  The assessment issued was in the sum of AU$6,705.50.

24.      On 6 December 2010, Ms Sheikholeslami requested that the Inspector-General review the subsequent assessment. By email dated 7 February 2011, a delegate for the Inspector-General advised Ms Sheikholeslami that her application for review was likely to result in an increase of her contribution from AU$6,705.50 to AU$13,066 because the Trustee had under-calculated her income by £7,766.24 sterling.  The preliminary assessment of the delegate was based on the higher income and the average monthly exchange rates applying during the first year of the bankruptcy.  The delegate invited Ms Sheikholeslami to withdraw her request for review.

25.      Ms Sheikholeslami did not withdraw her request and on 14 February 2011, she was served with a decision from the Inspector-General notifying her of a fresh assessment of her income contribution in the sum of AU$13,066.38. This assessment was based on Ms Sheikholeslami’s actual income for her first year of bankruptcy of £33,006.52 sterling, which was converted into Australian dollars using the average monthly exchange rates during the first year of bankruptcy obtained from the website of the Australian Taxation Office. In other words, the Inspector-General rejected Ms Sheikholeslami’s argument that the conversion should be undertaken at the time of the subsequent assessment of income contribution and converted the income using exchange rates applicable at or about the time the income was derived.

26. It is common ground that there is no provision in the Bankruptcy Act which specifically deals with the issue of the exchange rate to be applied when making an assessment or when foreign income should be converted into Australian dollars for the purposes of making such an assessment. It is also common ground that there has been no judicial or Tribunal consideration of the issue.

27. Ms Sheikholeslami contends that, for the purposes of calculating the income contribution payable by a bankrupt under s 139S, it is first necessary to determine the “actual income threshold amount”. This amount is calculated by reference to the “base income threshold amount”, which in turn is calculated by reference to a pension rate specified in the Social Security Act 1991 (Cth). The relevant pension rates in the Social Security Act are in Australian dollars. Section 139W provides that the actual income threshold is to be calculated at the time of assessment. According to Ms Sheikholeslami’s Counsel, it would therefore be logical for the Trustee, or the Inspector-General on review, to make a single calculation of the value of the threshold amount to apply to the income derived by the bankrupt at the time the income contribution assessment is made. In other words, as the formula provides for the actual income threshold amount to be calculated as at the time of the assessment, the income of the bankrupt should be similarly assessed and should be converted from pounds sterling into Australian dollars at the same time. It is also relevant that an assessment, and resulting liability to pay income contribution, does not take effect until the issue of the assessment. Furthermore, there is no entitlement in the legislation for the Inspector-General, or Trustee, to average exchange rate variations in respect of an income contribution period.

28. The Inspector-General contends that the Bankruptcy Act is silent on the issue and the Tribunal should therefore construe the Bankruptcy Act so as to “leave the greatest latitude” to determine which approach should be “embraced in order to achieve an outcome that is fair and just” (The Full Court, Re Griffiths 139 FCR 185 at [70]).  It is submitted that converting foreign income when it is earned will achieve an outcome that is certain, consistent with the operation of the income contribution regime and other legislation relating to the derivation income and the most fair and just between the parties in this matter, and in matters where the issue will arise in the future.

29.      The Inspector-General also contends that Ms Sheikholeslami should not be allowed to now raise a dispute about the exchange rate applied when one of the reasons she objected to the second assessment was that she was of the view the conversion should have been effected using the rate applying at the time of assessment.  The Inspector-General was not able to provide authority for the submission, other than the general argument that Ms Sheikholeslami should be estopped from arguing against her previously held view. Counsel for Ms Sheikholeslami rejected the argument and submitted there was no legislative basis to so limit Ms Sheikholeslami’s right of review.  The Inspector-General issued a fresh assessment and the assessment was either correctly or incorrectly calculated.

CONSIDERATION

30.      I do not accept the contention that Ms Sheikholeslami is estopped from arguing her case for two reasons. First, the facts do not support an estoppel. Secondly, but more importantly, there is no legislative basis to limit Ms Sheikholeslami’s right of review.

31. When Ms Sheikholeslami requested that the Trustee review the assessment of 15 December 2008, she raised a number of objections, one of which was that the Trustee had used the exchange rate applying at the time of the assessment rather than the rate applying at the beginning of the period, which was more favourable to her. Ms Sheikholeslami objection was about the “significant fluctuations” in exchange rates at the time, which she asserted had resulted from the impact of the global financial crisis. When read in its entirety, it is clear Ms Sheikholeslami’s objection was an application under s 139T of the Bankruptcy Act for hardship by reference to the particular circumstances of her case.

32.      Ms Sheikholeslami did not make a formal submission that the relevant date for conversion was the time her income was earned.  Indeed, at the time the Trustee made his assessment Ms Sheikholeslami had earned only two months income and his assessment was an estimate of what Ms Sheikholeslami would receive for the rest of the period. The Trustee applied the exchange rate as at 1 December 2008 but did not average the rate over the period. The Trustee responded that he would reassess her contribution at the end of the period based on the average monthly exchange rates during the period.

33.      Ms Sheikholeslami’s application for review to the Inspector-General raised similar concerns and by this stage a further issue was raised, namely that Ms Sheikholeslami’s employment status would change in March 2009.  The Inspector-General decided not to conduct a review on the basis the Trustee had addressed Ms Sheikholeslami’s concerns, including agreeing to reassess her liability after 12 months using the average monthly exchange rates for the period. Ms Sheikholeslami did not pay the second income contribution assessment and did not seek a review of the Inspector-General’s decision. On the other hand, the Trustee did not seek to enforce payment and reassessed Ms Sheikholeslami’s contribution on 1 December 2010, by which time the actual income earned by her in the period was known. Ms Sheikholeslami earned substantially less than the amount originally estimated by the Trustee and this was the most significant factor in reducing her income contribution assessment. The question of the correct date for conversion of Ms Sheikholeslami’s income for the purposes of calculating her contribution was not the central issue in the early assessments. 

34.      Furthermore, there is no evidence of prejudice to the Trustee or the Inspector-General or unfair advantage to Ms Sheikholeslami in now raising this argument. Ms Sheikholeslami waited until the subsequent assessments were made (based on her actual income) to seek a review the decision of the Inspector-General. There is nothing improper in Ms Sheikholeslami assessing her position at this stage and adopting the argument she considers will minimise her liability and, no doubt in her view, produce the fairest result. Her contention is certainly arguable.

35. Even if there was some factual basis for an estoppel, there is no legislative basis. Under s 139ZF, it is the Tribunal’s role to review the decision of the Inspector-General. The Inspector-General has all the powers of the Trustee under s 139ZD and may confirm or set aside the decision and make a fresh decision under s 139W (2) of the Bankruptcy Act. Assessments of the income contribution payable by a bankrupt are governed by s 139W of the Bankruptcy Act. There is no power for the Trustee and/or the Inspector-General to make this assessment based on discretionary factors, other than those set out in s 139T in respect of hardship. As Counsel for Ms Sheikholeslami submits, and I agree, the assessment must be based on the formula established under the Bankruptcy Act and the decision of the Inspector-General is either correct or incorrect.

36.      Having decided Ms Sheikholeslami may argue her case, the more difficult issue is to decide the exchange rate that should be applied when converting Ms Sheikholeslami’s foreign income to Australian dollars for the purposes of assessing her income contribution for the first year of bankruptcy.

37. I accept that if the legislation is silent, the Tribunal should construe the relevant legislation “to leave the greatest latitude”: to achieve an outcome that is “just and fair”. However, in my view this is not the case. While the Bankruptcy Act does not specifically provide for the exchange rate that should be applied, there is provision as to when the assessment of income should be made. This can be distinguished from the position in Re Griffith, which dealt with the legislative provisions in the Bankruptcy Act about the assessment of proofs of debt made by creditors of a bankrupt. Division I of Part VI of the Bankruptcy Act sets out the scheme for the admission, rejection and payment of proofs of debt. All debts and liabilities to which a bankrupt is subject at the date of bankruptcy are provable (s 82(1) of the Bankruptcy Act). A creditor must serve certain information on the Trustee in relation to the debt and the Trustee may either admit or reject the debt, in whole or in part. Once admitted, the debts are paid in accordance with Division 2 of Part VI of the Bankruptcy Act.

38.      There is no obligation on the Trustee to make an assessment of the quantum of the debt at a particular time and, as such, there are a number of possibilities as to when it may be appropriate for a foreign debt to be converted into Australian dollars.  In Re Griffith, the competing submissions were: the date of bankruptcy, the date when the debt became due and payable and the date which the Trustee, having allowed the proof of debt, proposes to pay a dividend.  The Court ultimately chose the date of bankruptcy as the date that would achieve “the fairer and more convenient operation” of the scheme.

39. In contrast, s 139W establishes the methodology for making assessments of income contributions payable by bankrupts and specifically provides when those assessments are to be made.

40. Section 139W (together with s 139S and s 139T) sets out how the contribution payable by a bankrupt is to be assessed. Section 139W (1) requires the Trustee “as soon as practicable after the start of the contribution assessment period” to undertake three related assessments for the purposes of assessing the income contribution of a bankrupt. This is the original assessment of the income contribution. First, the Trustee must make an assessment of “the income that is likely to be derived, or was derived, by the bankrupt” during the period. Secondly, the Trustee must make an assessment of “the actual income threshold that is applicable to the bankrupt when the assessment is made” [emphasis added]. Thirdly, the Trustee must make an assessment of the contribution (if any) that the bankrupt is liable to pay under s 139S of the Bankruptcy Act. The formula in s 139S includes the results of the first and second assessments.

41. While there is no express provision to this effect in the Bankruptcy Act, to give efficacy to the scheme the contribution payable must be calculated by reference to Australian dollars. It is clear the Trustee must make the original assessment at the beginning of the period and must assess the income of the bankrupt at this time. To make the assessment in Australian dollars, any foreign income would have to be converted to Australian dollars at the same time as the assessment and therefore calculated by reference to the exchange rate at the time of conversion. The fact there is specific reference to the actual income threshold “applicable when the assessment is made” adds weight to the construction that ss (1) requires all three assessments to be made at one point of time, namely at the time of assessment.

42. Section 139W (2) provides that a Trustee is to make a fresh assessment “at any time” if he or she is satisfied that the bankrupt’s circumstances have changed. As with the original assessment, the Trustee must make a fresh assessment of the income that is likely to be derived or, was derived, by the bankrupt during the period and the assessment must be made once he or she is satisfied of the changed circumstances. This fresh assessment would usually be after the end of the period when the Trustee has obtained details of the actual income earned by the bankrupt. The provision is in identical terms to ss (1) and calls for assessment, and therefore calculation of the income contribution, at a point of time. It follows that the income of the bankrupt must be converted to Australian dollars at the time of any fresh assessment. It also follows that the conversion should be effected using the relevant exchange rate at the time. There is no provision in the Bankruptcy Act that requires or allows conversion at some other time.

43.      In my view, an ordinary reading of the relevant provisions requires the foreign income of the bankrupt to be converted to Australian dollars at the time of the income contribution assessment.  As such, the exchange rate to be applied is that applying at the time of the assessment and there is no legal basis or justification to use the average monthly rates applying for the period the bankrupt earned the income. 

44. Even if I am wrong on this, I am nevertheless of the view that this construction is the most logical and convenient for the fair and just operation of the Bankruptcy Act.

45.      In this case, the recent market volatility has highlighted the practical differences between the two approaches. For instance, if the liability of Ms Sheikholeslami is assessed at the time of the fresh assessment by the Inspector-General, it is agreed between the parties that her income contribution will be AU$3,044.53.  If her liability is assessed at the time she derived her income and by reference to the average monthly exchange rates in the period, Ms Sheikholeslami’s income contribution will be AU$13,066.38. Counsel for the Inspector-General characterises this as an advantage for Ms Sheikholeslami and conversely a disadvantage for creditors. In my view, this reasoning is flawed.

46.      The liability of a bankrupt to pay an income contribution does not arise until there has been an assessment under s 139 W but, more importantly, the bankrupt will have to pay the contribution in Australian dollars at the time of assessment. It is logical and, indeed fair and just, that the amount paid should take into account the cost of conversion at the time the money becomes payable.  The Inspector-General submits the bankrupt will have the benefit of the more favourable exchange rates at the time income is derived.  This presupposes the bankrupt has, or will, convert income earned in foreign currency into Australian dollars at the time it is derived to hedge against currency losses in the future.  This is possible, but unlikely. There is no “advantage” to the bankrupt because the bankrupt is only required to pay an income contribution after an assessment is made. Similarly, the only “disadvantage” to creditors is the loss of the opportunity to be paid a greater amount based on the relative strengths between the Australian and a foreign currency at the time income is derived. 

47.      If the bankrupt was required to pay a higher amount of pounds sterling based on the increase in the Australian dollar, creditors would gain an advantage to the detriment of the bankrupt.  This is not consistent with the scheme, which is designed to ensure bankrupts pay an appropriate income contribution for creditors having regard to a formula which allows the bankrupt to retain sufficient reserves for living expenses. 

48. The Inspector-General contends there should be consistency between the income assessment provisions of the Bankruptcy Act and the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and, in particular Subdivision 960-C, which specifically provides that foreign income must be converted to Australian dollars at the time the income is derived/received. It is also noted s 139N provides that the income taken to be derived by a bankrupt should be reduced for the income tax the bankrupt is liable to pay and this would require conversion at the time the income was derived. However, tax is not payable in Australia on foreign income where a person is not an Australian resident for tax purposes (s 11.15 ITAA 1997). It is not disputed that Ms Sheikholeslami was taxed on her income in the United Kingdom and the amount identified as “income” for the purposes of income contribution under the Bankruptcy Act is net of tax.

49. As a general rule, where a bankrupt does not reside in Australia, there will be no need for any calculation to be made converting foreign income to Australian dollars for the purposes of assessing tax payable. If the bankrupt resides in Australia and earns foreign income, there may be such a need and the ITAA specifically provides for conversion to take place at the time the income is derived or received. It is true that in these cases under the construction proposed by Ms Sheikholeslami and favoured by me, different exchange rates will apply for the purposes of assessing the bankrupt’s income contribution. This may not be convenient but it recognises there is a special rule for assessing foreign income derived or received by Australian residents for the purposes of tax. These provisions were inserted into the ITAA by the legislature and are no doubt based on particular policy considerations. There are no such provisions in the Bankruptcy Act and in my view the Inspector–General has not provided a persuasive argument as to why these provisions should apply to bankruptcy.

50.      In summary, I find that the fresh assessment made by the Inspector-General on 14 February 2011 was incorrectly calculated using the average monthly exchange rates applicable at the time Ms Sheikholeslami derived her foreign income rather than the exchange rate applicable at the time of assessment. The decision of the Inspector-General should be varied and the income contribution liability of Ms Sheikholeslami in respect of her first year of bankruptcy is to be calculated based on the exchange rate applicable at the time of assessment, being 14 February 2011.

I certify that the 50 preceding paragraphs are a true copy of the reasons for the decision herein of Ms J L Redfern, Senior Member.

Signed: .............................[sgd].................................................
  Casey Comans, Associate

Dates of Hearing  5 August 2011
Date of Decision  28 September 2011
Counsel for the Applicant         Mr James Johnson
Solicitor for the Respondent     Mr Stephen Mullette