Swan and Inspector General in Bankruptcy

[2007] AATA 2103

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2007] AATA 2103

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No N2007/2412

GENERAL ADMINISTRATIVE  DIVISION		)
Re		RICHARD JAMES SWAN

Applicant

And INSPECTOR GENERAL IN BANKRUPTCY

Respondent

DECISION

Tribunal Ms G Ettinger, Senior Member

Date24 December 2007

PlaceSydney

Decision The Tribunal affirms the decision under review.

[SGD]

Ms G Ettinger     
  Senior Member

CATCHWORDS

Bankrupt - repayment of loan to friend by shares transferred from Applicant's mother to friend's wife, at the request of the Applicant, outside terms of Trustee in Bankruptcy arrangements - treatment of the loan – definition of income in the Bankruptcy Act 1966 - how the loan amount impacts on  the CAP - decision under review affirmed.

Bankruptcy Act 1966 s 139L

Bankruptcy Regulations 1996 reg 6.12

Fringe Benefits Tax Assessment Act 1986 s 20

Bond v Ramsay (1994) 125 ALR 399

REASONS FOR DECISION

24 December 2007 Ms G Ettinger, Senior Member     

1.      The facts in this matter are generally agreed as between the parties. Mr Richard Swan arrived in Sydney from the UK in 1985, and engaged in various jobs, including scaffolding, and labouring. He later also did landscaping and property development. Mr Swan borrowed money from his mother from time to time, which he repaid, and also borrowed from others, including a friend, Mr SC.

2.      Mr Swan was declared bankrupt on 22 March 2006 on presentation by him of a debtor’s petition. At that time, he owed his friend Mr SC $54,000 plus interest, which made a total of some $64,800, and when Mr SC asked him for repayment, Mr Swan turned to his mother in the UK to whom he had previously transferred shares. Mr Swan’s mother whose statement of 18 September 2007 was Exhibit A2 before the Tribunal, corroborated Mr Swan’s evidence, which was that, as agreed between them, she transferred 180,000 shares in Dolomatrix International Ltd (Dolomatrix), to Mr SC’s wife on 15 May 2006, in repayment of the loan. When realised, 130,000 of the 180,000 shares represented the repayment of the loan. It was undisputed that Mr Swan had expressed a commitment to repay his mother. It is to be noted that notwithstanding, over  a year later, on 8 August 2007, Mrs Mary Swan lodged a proof of debt with the trustee of the bankrupt estate of Mr Swan.

3. On 12 January 2007, the Trustee made his assessment of Mr Swan’s income during the Contribution Assessment Period (CAP1) which commenced on 22 March 2006, and was for the period up to 21 March 2007 (PTT3/55). He assessed the total income for CAP1 as $98,406.14, and stated that he applied section 139L(1)(v) of the Bankruptcy Act 1966 (the Bankruptcy Act), holding that the transfer of the shares from Mrs Swan to Mr SC’s wife was income for Mr Swan, on the basis that it was a loan to the bankrupt from Mrs Swan to repay the debt owed by him to Mr SC.   The Trustee took into account $68,512.24, being the value of the shares sold by Mr SC’s wife representing repayment of the loan.

4.      When the Trustee had made his calculations, Mr Swan’s compulsory income contribution for the CAP1 period was assessed to be $29,826.90.

5.      Mr Swan appealed the Trustee’s decision on 13 March 2007.  A delegate of the Inspector-General in Bankruptcy of The Insolvency and Trustee Service Australia, (ITSA), set aside the decision of the Trustee and issued a fresh assessment on 14 May 2007 in which he indicated that for the relevant period, Mr Swan’s assessed income was $101,159.44 and the contribution liability, $31,324.47  (T8).  He also held that the closing price for the Dolomatrix shares was $0.48 on the day of transfer, making the value $86,400.

6.      I accepted the explanation that the main reason for the difference between the $31,324.47 calculated by ITSA, and the $29,826.90 calculated by the Trustee was a timing difference in assessing the value of the shares.

7. Mr Swan appealed the decision of ITSA. Before me, both parties argued that the basis on which ITSA made its decision, which was applying section 20 of the Fringe Benefits Tax Assessment Act 1986 (the FBT Act), was inappropriate. I do not need here to deal in detail with that decision, rather, as this is a hearing de novo, I must make the correct or preferable decision regarding the treatment of the repayment of the debt to Mr SC. Mr Coffey, of Gells Lawyers, who appeared for Mr Swan argued that I should make a “rational” decision.

8.      Both parties handed up background material, extracts from relevant debates in the Senate dated 14 November 1991 and 22 August 1995 and other documents, including the Explanatory Memorandum (EM) to the Bankruptcy Legislation Amendment Bill 1996 which preceded amendments to the relevant legislation. Mr Coffey also handed up, and referred in his submissions, to flowcharts as produced by the LawBook Company. I am indebted to the parties for the time they have taken to prepare comprehensive Statements of Facts and Contentions, and written supplementary submissions.

Issue to be Decided

9.      The decision I have to make is the correct and preferable decision in relation to how the transfer of the 180,000 shares from Mary Swan to Mr SC’s wife, at the request of Mr Swan, who owed money to Mr SC, should be characterised.

10.     I am satisfied that the inclusion of the health fund contribution of $294 in assessing the Applicant’s liability for contribution which was mentioned in the documents was not further argued at the Tribunal, and was accordingly not in dispute, and that is has been correctly included.

Was the Share Transfer a Loan from Mary Swan to the Applicant

11.     I am satisfied from the evidence of Mr Swan (Exhibit A1), that he asked his mother to transfer 180,000 shares in Dolomatrix to Mr SC’s wife in order to satisfy the debt he owed to Mr SC, and further, that he expressed a clear intention to repay his mother, the implication of that being of course, that he borrowed the amount of the value of the shares from her.  At paragraph 14 of Exhibit A1, Mr Swan stated:

“I  told Mr S… words to the effect of ‘My Mother had agreed to help. She will transfer some shares to you and I will repay her later’.”

12.     There was also evidence in the T-documents that Mr Swan had previously borrowed money from his mother, and repaid certain amounts.

13.     In the second paragraph of the Applicant’s Supplementary Submissions which were filed at the Tribunal before the hearing, Mr Swan’s solicitor submitted:

“Mr Swan says that the inference to be drawn from the evidence currently before the Tribunal is that the transaction whereby Mrs Swan transferred shares to Mrs Garcia should for the purposes of the Tribunal proceedings be properly characterised as a loan pursuant to section 139L (a) V (sic) of the Bankruptcy Act 1966 (CTH) and regulation 6.12 of the Bankruptcy Regulations 1996.”

14.     I noted that Mr Coffey characterised the share transfer as a loan for “the purposes of the Tribunal proceedings”. However I am satisfied from the evidence that for all purposes, rather than just the Tribunal proceedings, the transfer of the 180,000 shares to the wife of Mr SC was in satisfaction of the debt between Mr Swan and Mr SC, and was by way of a loan from Mary Swan to the Applicant.

ITSA’s Application of the Fringe Benefits Tax Assessment Act 1986

15. ITSA held that the value of the transfer of shares was income to Mr Swan by way of a fringe benefit pursuant to section 139L(1)(a)(v) of the Bankruptcy Act and Regulations, and the provisions of the FBT Act, in particular section 20.

16. I noted that section 20 of the FBT Act states that:

“Where a person (in this section referred to as the provider):

(a) makes a payment in discharge, in whole or in part, of an obligation of another    person (in this section referred to as the recipient) to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the recipient), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.”

17. As relevant section 139L(1)(a)(v) 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 that Act but subject to any modifications of any provisions of that Act made by the regulations under this Act;”

18.     Mr Coffey argued that there might be some ambiguity about whether the payment by Mrs Swan to Mr Scott was by way of a discharge of the debt or an assignment of the right to prove in the estate by Mr Scott to Mrs Swan.

19.      Mr Coffey argued that Mr Swan had not benefited from the payment as there had been no benefit provided to him, and Mrs Swan had lodged a proof of debt with the trustee of the bankrupt estate of Mr Swan.

20.     In coming to a decision about whether there was any ambiguity, I was mindful of the expressed intention by Mr Swan to repay his mother at the time of the transfer of shares in 2006. I also noted the long lead time between the transfer of the shares and the date of the lodgement of the proof of debt which was 8 August 2007. Accordingly I am satisfied that the lodgment of proof of debt was an afterthought. I did not have any documents to support Mr Coffey’s argument. As stated in the paragraphs above, I have found from the evidence that the transfer of the shares to Mr SC’s wife was a loan from Mrs Swan to her son. I shall refer to it as “the loan”.

21. Both Mr Coffey and Mr Allatt of the Australian Government Solicitor who appeared for the Respondent agreed that section 20 of the Fringe Benefits Act did not properly apply. Mr Allatt submitted in his Statement of Facts and Contentions that whilst both the Trustee and ITSA stated in their decisions that they relied on section 139L(1)(a)(v) of the Bankruptcy Act, the reasoning of the Trustee led to the conclusion he was not relying on sub-section (v), but was in fact relying on section 139L(1)(a)(vi) of the Act. Mr Allatt acknowledged that section 139L(1)(a)(v) of the Bankruptcy Act and section 20 of the FBT Act were difficult to reconcile with the facts of this matter, but submitted that it was nevertheless open to me to find that both sections 139L(1)(a)(v) and (vi) applied.

22. Given the wording of section 20 of the FBT Act, it is not unreasonable for ITSA to have applied section 20 to Mr Swan’s situation. However in my view it is more appropriate to consider the situation pursuant to section 139L(1)(a)(vi) of the Bankruptcy Act.

the applicant’s argument

23.     Mr Coffey referred to flow charts for the Bankruptcy Act produced by the Law Book Company. He referred to section 139L(a)(v), submitting that the value of the loan should be calculated by applying sections 16 – 19 of the FBT Act which meant that the value of the loan is the amount by which the annual notional interest exceeds the amount of interest that has actually accrued on the loan.

24.     He submitted that the amount of interest actually charged or to be charged on the loan was “nil”, and that the notional interest be calculated by reference to the statutory “benchmark interest rate” which for the 2005 - 2006 FBT year was 7.05% per annum. Further, the difference between the notional interest rate of  7.05% and the amount actually charged or to be charged (nil or 0%) was therefore 7.05%.

25.     Mr Coffey submitted that if the Tribunal found that the amount loaned was the equivalent to the value of the shares sold on or about the date that they were transferred, being 15 May 2006, then using the closing price for the shares on that date, the amount of funds loaned was $86,400 (PTT8). Applying the notional interest rate of 7.05% to the sum of $86,400, the figure of $6,092.20 is obtained. 

26.     Again referring to PTT8 he submitted that for the purposes of the Tribunal proceedings, the figure of $14,464.54 should be accepted as Mr Swan’s actual taxable income for the relevant period.

27.     He referred to PTT8 and contended that accordingly, the reference to “Expense payment $86,400.00” should be substituted with $6,092.20, representing the value of the loan, being the difference between the notional rate of interest and the actual rate charged (being zero).

28. Mr Coffey submitted that the Respondent had not demonstrated by reference to case law or otherwise why the loan ought to fall to section 139L(1)(a)(vi) as opposed to section 139L(1)(a)(v), and did not advance any rationale as to why the loan should be valued at the face value of the transfer of shares as opposed to the statutory formula referred to above by the Applicant. He submitted that had Parliament intended to equate the quantum of a loan with its value, the section would have expressed Parliament’s intention accordingly. He submitted that the loan by Mrs Swan to her son postdated the bankruptcy, and that section 139L(1)(a)(v) and the fringe benefits regime applied. He submitted that Mr Swan’s income was below the relevant level and accordingly no contribution was payable.

29. Given that I have decided on the basis of the evidence before me that the value of the shares was a loan from the Applicant’s mother to him, I considered the application of section 139L(1)(a)(vi).

The Application of section 139L(1)(a)(vi) of the Bankruptcy Act

30. I have noted that section 139L(1)(a)(vi) of the Bankruptcy Act deals with the topic of loans made to bankrupts for the purpose of determining a bankrupt’s income. As relevant it follows:

“In this Division:

Income, in relation to a bankrupt, has its ordinary meaning, subject to the following qualifications:

(vi) the value of a loan made to the bankrupt by an associated entity of the bankrupt, including:

(A) a loan under which the money is not paid to the bankrupt, but is paid or applied at the bankrupt’s direction; and

(B) a loan that is not enforceable at law or in equity:”

31. Mr Allatt argued that pursuant to section 139L(1)(a)(vi) of the Bankruptcy Act, the value of the loan was properly included in the Applicant’s assessable income for the purpose of calculating his contribution liability to his bankrupt estate. He argued that Mrs Swan was “an associated identity” as defined in section 5C(2) of the Bankruptcy Act, and that there was no question she had transferred the shares at Mr Swan’s request and direction.

32.     Mr Allatt submitted that the proviso in the section that it includes the kinds of loans described in (A) and (B) merely ensured that the full purpose of the section was properly established, that is to capture all loans made to bankrupts, and to include them in the assessment of a bankrupt’s income. I accepted the Respondent’s argument that from the language of the section, it was intended to apply to all loans to bankrupts.

33. Mr Allatt submitted that I should have regard to the EM which accompanied the introduction of section 139L(1)(a)(vi). He submitted that a perusal of paragraph 95.7 of the EM, indicated the purpose of the section was to have the value of loans or “funds made available under a loan”, which otherwise did not vest in the trustee included in the income calculation.

34.     He submitted that the use of the words “the value of a loan” in the section, when read with the EM plainly comprehended a monetary loan, that is, a loan of money. The way to “value” a loan of money was simply to ascertain the monetary worth of the loan he submitted, that is, the dollar amount of the loan. Mr Allatt submitted that it did not matter in the present case, for the operation of the section, whether the provisos contained in (A) and (B) applied or not, because the section applied to all loans to bankrupts which did not otherwise vest in the trustee.

35.     Mr Allatt submitted that the method of valuing the loan used in the decision under review was the correct method, namely that the value of the shares at the time of transfer was to be taken as the value of the loan. The amount so calculated was $86,400. 

36. Mr Allatt submitted that the Applicant in his supplementary submissions sought to limit the application of section 139L to only include consideration of section 139L(1)(a)(v). From the Respondent’s point of view such limitation on the operation of s139L was unsupportable he said. Mr Allatt submitted that both sub-sections (v) and (vi) were applicable, and that the Inspector General could have included both. To apply sub-section (v) would lead to a higher contribution requirement as it would involve the addition of the interest calculation to the value of the shares. The Inspector General had elected not to include both calculations. Even though the Respondent did not press for the application of section 139L(1)(a)(v) he submitted that it was open to the Tribunal to include consideration of it as well as subsection (vi).

37.     Mr Allatt submitted that the Tribunal should find that the Applicant is liable to make a contribution to his bankrupt estate in the amount of $38,510.50.

Conclusions

38.     In conclusion, I have to make the correct or preferable decision regarding how the transfer of the 180,000 shares from Mary Swan to Mr SC’s wife, at the request of Mr Swan, who owed money to Mr SC, should be characterised. I am satisfied that the facts in this matter are not in dispute. I am satisfied from the evidence as found in the paragraphs above, that the value of the shares Mary Swan transferred to Mr SC’s wife at her son’s request was a loan from Mary to her son. Clearly he undertook to repay it.

39. I have considered the application of section 139L(1)(a)(v) of the Bankruptcy Act and section 20 of the FBT Act as referred to in the reviewable decision. I am satisfied that notwithstanding Mr Allatt’s submission that either section 139L(1)(a)(v) or section 139L(1)(a)(vi) of the Bankruptcy Act can apply in this case, it is more appropriate to apply the latter. I cannot find that the term “expenditure” in section 20 of the FBT Act applies, or that Mr Swan received a fringe benefit. I have found, in applying section 139L(1)(a)(vi) of the Bankruptcy Act that the value of the shares, being $86,400 was income in regard to Mr Swan.

40. I have based the decision to apply section 139L(1)(a)(vi) in part on the Senate debates I had before me, and the EM (as referred to above), and the reasons given therein for the introduction of section 139L(1)(a)(vi), referred to in the EM as paragraph “(f)”, arising out of the excesses of the eighties as they have popularly become known.

41.     The speech in the Senate of 22 August 1995 is relevant where the key amendment referred to was Division 4B of Part VI in relation to the definition of income to overcome the restrictive interpretation placed on it in Bond v Ramsay (1994) 125 ALR 399.

42.     A passage from the Senate of 22 August 1995 follows:

“The Bankruptcy Amendment Act 1991 made a number of important reforms including, among other things, the introduction of a regime of compulsory contributions from income by bankrupts whose incomes exceed a specified threshold. …..

The key amendment proposed to the Act by the Bill in relation to the income contribution scheme established under Division 4B of Part VI of the Act is the revision of the definition of ‘income’, in particular to overcome the restrictive interpretation placed on it by the Federal Court in the case of Bond v Ramsay (1994) 125 ALR 399.

…. However, the Federal Court in Bond v Ramsay considered the definition of income was inadequate to enable the value of benefits provided to a bankrupt in other than an employment context to be included.

…

Also the definition of ‘income’ is to be further expanded so that it will encompass the value of ‘loans’ given to the bankrupt, whether or not the loans are strictly loans in a legal sense, or whether they are advances pursuant to some arrangement or understanding whether or not enforceable at law or in equity…”

43.     At paragraph 95.7, the EM stated:

“The Bill also proposes the introduction of a new paragraph (f) into section 139L (subsequently (vi)), relating to the value of loans given to a bankrupt, to the extent that the loan or funds made available under it are not assets which otherwise vest in the trustee.

(f) the term ‘income’ will include the value of a loan made to the bankrupt by an associated entity of the bankrupt including under a loan under which loan money is not given to the bankrupt but is paid or applied at the bankrupt’s direction and a loan that is not enforceable at law or in equity.

A common abuse by bankrupts …. is for the entity to establish, and record in its accounts and records a ‘loan account’ in favour of the bankrupt, which can result in substantial funds being made available to a bankrupt.

…

Thus so called loan moneys are frequently in substance, if not in legal reality or form, gifts, and it is appropriate that such facilities should be taken into account in assessing the income of a bankrupt during the period of bankruptcy. …”

44. Accordingly, applying section 139L((1)(a)(vi) of the Bankruptcy Act, the value of the shares, calculated at $0.48 on the day of transfer of the 180,000 shares was income in relation to Mr Swan.  It was the value of the loan made to Mr Swan, the bankrupt, by an associated entity (his mother), and was paid not to him, but at his direction, and was a loan not enforceable at law. I note that we had no evidence of any contractual arrangement regarding repayment between mother and son other than the verbal exchanges in the documents.

45.     I prefer the Respondent’s argument in this matter, and find that the value of the loan was $86,400, and that it was income in relation to Mr Swan. I have come to the same result as the delegate of the Inspector General in Bankruptcy albeit by applying a different sub-section of the Bankruptcy Act.

46.     The contribution the Applicant must make to his bankrupt estate is as calculated by the Respondent, that is $31,324.47.

Decision

47.     The Tribunal affirms the decision under review.

I certify that the 47 preceding paragraphs are a true copy of the reasons for the decision herein of Ms G Ettinger, Senior Member

Signed:         .....................................................................................
  Associate

Date of Hearing  1 November 2007
Date of Decision  24 December 2007        
Solicitor for the Applicant          Mr M Coffey, Gells Lawyers       
Solicitor for the Respondent     Mr M Allatt, Australian Government Solicitor