Alert! Government makes up its mind on bankruptcy changes

After an abortive first effort the Federal Government has finally come back with a heavily revised set of proposals to amend the Bankruptcy Act. As you may recall, the need and desire to strengthen the currency bankrupcty regime was brought about by a number of high income earning professionals (chiefly barristers) using serial bankrupcty to avoid paying their debts. (A cynic might suggest the Government only got moving on this because the ATO was usually the major creditor of these individuals and there was a lot of adverse press reports once the existence of these individuals hit the mainstream media.)

An outline of the amendments and the Attorney-General's media release are available from www.itsa.gov.au.

Broadly speaking, some of the timeframes in the Act will be increased from 2 years to 4 years and there are some procedural changes. Whilst most of the changes announced seem fairly reasonable there is one potentially far-reaching change to the way some asset protection structuring is carried out. That change is "proposal four".

Under the Bankruptcy Act as currently enacted the bankruptcy trustee has power to obtain property from controlled entities, i.e. companies and trusts that are controlled by the bankrupt and have benefited from his or her personal services. However, the current provisions do not apply where, for example the non-bankrupt spouse acquires say the family home largely through the bankrupt’s financial contributions and the bankrupt uses or derives a benefit from that property, ie lives in the family home. Proposal four will change all that.

In essence the outline of amendments suggests that the non-bankrupt spouse/relative or associate can be hauled up for examination about the extent to which the bankrupt contributed to the acquisition and ongoing funding of the assets owned by the non-bankrupt.

What remains dangerously unclear at this stage is exactly how the bankrupt person and non-bankrupt person's respective contributions are going to be judged. In particular, whether the significant non-financial contribution which a non-working spouse makes to the overall acquisition of assets through domestic services and childcare (which would otherwise have to be paid for) is going to be counted.

The Government's argument for extending the provision to apply to natural persons is that just as a person can hide their own assets in a trust or company, they can do so by placing them with a spouse or other relative or associate. Whilst that's certainly true, the provision has the potential to operate quite unfairly and oppressively. Particularly given the fact that the non-bankrupt person can be examined for up to 4 years from the act of bankruptcy (up from 2 years assuming one of the other proposals is enacted).

Placing assets in the hands of the non-risk spouse is often used as an asset protection technique. The technique is especially popular with the family home as ownership by the off-risk spouse preserves the main residence (aka PPOR) capital gains tax exemption. Whilst the full impact of the changes, once available, will need to be digested, this change may mean a drastic rethink for many asset protection plans.

Legislation to make these proposed amendments is scheduled for introduction in the Spring parliamentary sittings. As always the devil is in the detail, so we'll keep you posted as things develop.

Regards