Bills Digest no. 105 2005–06
Bankruptcy Legislation Amendment (Anti-Avoidance)
Bill 2005
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Bankruptcy
Legislation Amendment (Anti-Avoidance) Bill
2005
Date
introduced: 7
December 2005
House: House of Representatives
Portfolio: Attorney-General
Commencement:
Sections 1 3 commence on
the day of Royal Assent. Schedule 1 commences on the
28th day after the day of Royal Assent.
The Bill seeks to make amendments to the Bankruptcy Act
1966 (the Act) to strengthen provisions allowing the trustees
of bankrupts to claw back or recover property disposed of by the
bankrupt prior to the bankruptcy.
Early in 2001 Paul Barry reported in the Sydney Morning
Herald that a number of high-flying Sydney barristers are
abusing the tax system .(1) According to Barry, these
barristers repeatedly fail to meet tax demands, typically do not
lodge tax returns, rack up debts of up to $2 million, and then seek
shelter in bankruptcy, which wipes out their debts .(2)
The paper identified barristers who were bankrupt and owed
substantial sums to the Australian Tax Office as well as to other
creditors but who enjoyed the use of assets owned by third parties,
typically their wives or family trusts. Less than a month later the
Commonwealth Attorney-General and Assistant Treasurer issued a
joint news release titled bankrupt lawyers in which it was
announced that a taskforce had been established to determine
whether any changes were needed to the bankruptcy and taxation laws
to ensure that people are prevented from using bankruptcy as a
means of avoiding their tax obligations.(3)
The recommendations of the Taskforce(4) established
by the Federal Government in March 2001 formed the basis of the
Bankruptcy Legislation Amendment (Anti-Avoidance and Other
Measures) Bill 2004 (BLAAAMB), an exposure draft of which was
released on 14 May 2004 by the Attorney-General.(5) The
Attorney-General advised that the Bill would make changes under
which 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
.(6)
The exposure draft of the BLAAAMB was the subject of an inquiry
by the House of Representatives Standing Committee on Legal and
Constitutional Affairs. In submissions to the Inquiry, much
criticism was made of the proposed changes including that they:
-
represented a disproportionate response
-
would unfairly impact on asset protection arrangements
-
were retrospective in effect
-
would place an onerous burden on asset owners by reversing the
onus of proof, and
-
were unconstitutional.
Details of these criticisms and the Committee s response can be
found in Chapter 3 of the report available here: http://www.aph.gov.au/house/committee/laca/bankruptcy/report.htm
The Committee recommended that the proposals in the BLAAAMB
relating to the proposed new claw back provisions be abandoned, and
that the Attorney-General undertake further consultation with a
view to strengthening the existing provisions in sections 120 and
121 of the Bankruptcy Act.(7)
The Government responded by withdrawing the exposure raft of the
BLAAAMB and revising it, in consultation with relevant
stakeholders.(8) This Bill, the Bankruptcy Legislation
Amendment (Anti-Avoidance) Bill 2005, is the result of that process
of consultation.
Schedule 1, item 2 adds new subsection
(3) to section 77C of the Act. Section 77C empowers an
official receiver to require any person to provide information
connected with the performance of the receiver s functions under
the Act. A power to require a person to give evidence on oath is
included. The intention of the new subsection is to ensure that any
transcript of proceedings carried out under section 77C can be used
in proceedings relating to the bankrupt estate.(9)
Section 120 of the Act makes certain transfers of property by a
person who later becomes bankrupt (the transferor) to another
person (the transferee) void as against the trustee of a bankrupt.
Currently subsection 120(3) has the effect that a transfer will not
be void where it occurred more than two years prior to the
bankruptcy and the transferee proves that, at the time of the
transfer, the transferor was solvent. Schedule 1, item
7 repeals the existing subsection 120(3) of the Act and
replaces it with a new subsection. The new subsection has the same
effect as the current subsection except that it provides that where
the transfer was to a related entity of the transferor, then it
must have occurred more than 4 years prior to the bankruptcy, if it
is to be preserved. The term related entity is defined quite
broadly in section 5.
The policy considerations behind this amendment are that it is
common for people to be aware that they are likely to become
bankrupt more than two years before the event and also it is more
likely in practice that assets will be transferred to related
parties when seeking to avoid creditors than to strangers. It is
thought that currently, there is too much scope in the period
between two and four years for a person to deliberately divest
themselves of assets.(10)
Schedule 1, item 8 adds to section 120
subsection (3A). The new subsection provides a
rebuttable presumption, for the purposes of subsection 120(3), that
the transferor was insolvent at the time of the transfer if it is
established that the transferor had not kept and preserved proper
accounts and records in relation to their business.
Subsection 120(1) and 120(4) refer to consideration . Subsection
120(1) renders transfers void where they are made within 5 years
before the bankruptcy and where there was no consideration (payment
of any kind) by the transferee or where the consideration given was
below market value. Subsection 120(4) provides that where a
transfer is void a trustee must repay to the transferee any
consideration given for the transfer. Subsection 120(5) lists
certain things which are taken not to be consideration for the
purposes of subsection (1)&(4). Schedule 1, item
10 adds to subsection 120(5) a new subparagraph
(e), which provides that the right to live at the
transferred property, if given by one spouse to another, does not
constitute consideration unless it relates to a transfer,
settlement or agreement under the Family Law Act 1975.
Section 121 of the Act is similar in effect to section 120 but
provides that transfers are void where they are specifically for
the purpose of defeating creditors. Subsection 121(4) creates
exceptions in certain cases, such as where the transferee did not
know that the transferor s purpose was to avoid creditors.
Schedule 1, item 12 inserts the phrase or could
not reasonably have inferred after know in subsection 121(4)(b).
This has the effect of tightening the scope of the exceptions so
that a test of reasonableness is added to the person s claim that
they did not know the reason for the transfer. In the Explanatory
Memorandum this is referred to as wilful blindness on the part of
the transferee.(11)
Schedule 1, item 13 adds to section 121,
subsection (4A) which has the effect of adding the
same rebuttable presumption of insolvency in relation to section
121 as item 8 does in relation to section 120 (see
above).
Schedule 1, item 15 has the same effect in
relation to section 121 as item 10 does in relation to section 120
(see above).
One possible method of avoiding creditors is for a person to
accumulate wealth in the name of another person or entity, but
retain the use or benefit of that property themselves. Division 4A
addresses this situation in respect of entities by allowing the
trustee of a bankrupt to apply to the court for an order vesting
property of the entity in the trustee. The Bill proposes a number
of amendments to the division to:
-
Extend the time period to which the division applies (the
examinable period );
-
Ensure that the provisions of the division apply to situations
where the relevant property is held in the name of a person as well
as an entity;
-
Widen the notion of benefit in the division to ensure that it
covers circumstances where there is a benefit to the bankrupt
derived directly or indirectly.
Schedule 1, item 17 inserts new section
139CA into the Act. This section provides a definition of
examinable period for the purposes of the division. The applicable
period will be four years before the commencement of the bankruptcy
to the day the application is made, where the order is sought
against a related entity of the bankrupt, and 2 years before
commencement of the bankruptcy to the day the application is made,
in other circumstances. Both of those times can be extended as far
back as five years before the commencement of the bankruptcy to the
date on which the bankrupt became insolvent.
Schedule 1, item 18 adds words to section 139D
limiting the operation of that section to circumstances where an
order is sought in relation to a respondent other than a natural
person.
Schedule 1, item 19 adds the phrase whether
directly or indirectly after the word derived in the phrase derived
a benefit from in subparagraph 139D(1)(d).
Schedule 1, item 20 adds new section
139DA. This section deals specifically with the
circumstance where applications are made in respect of an entity
that is a natural person.
Schedule 1, item 22 inserts new section
139EA. This section has the same effect as section
139DA, except that it deals with circumstances where the
value of the relevant property has increased as a result
of contributions from the bankrupt, as opposed to where it was
acquired by means of such contributions.
The provisions contained in the Bill will strengthen the claw
back provisions in the Bankruptcy Act by clarifying some of the
existing provisions and expanding their application. They
represent, however, much less of a radical strengthening of the
provisions than was proposed in the BLAAAMB. Whether these changes
will have a significant impact on the practice that was the initial
catalyst for concern, that of high-income professionals using
bankruptcy to avoid their debts, is a matter for debate.
-
Rich lawyers dodging income tax , Sydney Morning
Herald, 26 February 2001.
-
ibid.
-
Daryl Williams MP and Senator Rod Kemp, Joint News
Release, 22 March 2001.
-
Australian Taxation Office, Insolvency and Trustee Service
Australia and Treasury, Joint Taskforce Report on the use of
bankruptcy and family law schemes to avoid payment of tax ,
Attorney-General s Department, January 2002.
-
Philip Ruddock MP, Tougher laws to stop bankrupts living the
high life , News Release, 14 May 2004.
-
ibid.
-
Recommendations 2 and 3.
-
Government Response to the Standing Committee on Legal and
Constitutional Affairs Report of the Inquiry into the exposure
draft of the Bankruptcy Legislation Amendment (Anti-Avoidance and
Other Measures) Bill 2004, p. 2.
-
Explanatory Memorandum, Bankruptcy Legislation Amendment
(Anti-avoidance) Bill 2005, p.5.
-
ibid., p. 3.
-
ibid.
Jerome Davidson
17 March 2006
Bills Digest Service
Information and Research Services
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Australian Parliament using information available at the time of
production. The views expressed do not reflect an official position
of the Information and Research Service, nor do they constitute
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ISSN 1328-8091
© Commonwealth of Australia 2006
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Published by the Parliamentary Library, 2006.
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