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Asset Protection and the Bankruptcy
Act
The Attorney-General, Mr Philip Ruddock, recently released
an exposure draft of legislation that is said to target high
income earners who use bankruptcy to avoid paying debts. TheÂ
draft legislation aims at allowing bankruptcy trustees to
recover assets held by third parties where those assets have
been acquired using income generated by the bankrupt. The
Attorney's initiative arises out of concerns expressed
in recent years about a number of high profile barristers
who failed to pay their income tax obligations while related
entities acquired assets using the barristers income.
Few of our readers would have much sympathy for barristers
and other high income earners who wilfully or recklessly fail
to pay income tax whilst accumulating assets in the names
of related parties. But the draft legislation is not limited
to such cases; it appears to extend to anyÂ
bankrupt including those who have had a modest income
and who have attempted to protect themselves and their family
from the uncertainty and risks of everyday business byÂ
using what until now has been seen as legitimate and proper
structuring.
An outline of the Attorney's press release and the Explanatory
Memorandum are shown below. We are in the process of studying
the draft legislation and we will include a fuller analysis
and commentary in our next Newsletter.
The Attorney announced:
"Under these changes, the trustee in bankruptcy will
be able to recover assets held in the name of the bankrupt's
spouse, or that of another party, where the bankrupt has paid
for and uses the asset,"Â .
"These changes will mean that high income earners who
become bankrupt won't be able to rely on financial arrangements
designed to shield assets from creditors."
Other changes included clarifying the rights of the parties
when family law and bankruptcy issues need to be resolved
and giving the bankruptcy trustee stronger powers to collect
income contributions during bankruptcy.
"The bankruptcy trustee is also given enhanced powers
to apply to set aside transfers of property under family law
financial agreements where those transfers put that property
beyond the reach of creditors,"
The Attorney-General said these changes were based on the
recommendations of the Joint Taskforce Report on the Use of
Bankruptcy and Family Law to Avoid Payment of Tax- an inter-agency
report proposing changes to bankruptcy, family and tax laws
to crack down on high-income tax avoiders.
The Government was keen to ensure there was an opportunity
for Parliamentary and public scrutiny of the reform proposals,
and had referred the draft legislation to the House of Representatives
Standing Committee on Legal and Constitutional Affairs, he
said.
According to the Explanatory Memorandum, the objectives of
these new provisions will be:
(a) improve the ability of bankruptcy trustees to recover
assets from bankrupts who do not own these assets personally
but who have funded the acquisition of assets by third parties
whilst retaining the use or benefit of those assets;
(b) provide a more effective means of collecting income contributions
from bankrupts who do not receive their income as a salary
or wage;
(c) prevent the misuse of financial agreements as a means
of avoiding payment to creditors; and
(d) address longstanding issues concerning the interaction
between family law and bankruptcy.
The time period for recovery of these assets is set at 10
years but "the provisions will not apply where the third
party owner provided market value consideration in return
for the original transfer and the transfer occurred more than
10 years prior to the bankruptcy. Nor will they apply
where the third party provided market value consideration
in return for the original transfer and, where the transfer
occurred less than 10 years prior to bankruptcy, the transferee
was unaware of the bankrupt's purpose in making the transfer
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