Bankruptcy – An introduction to income contributions

The vast majority of people do not have to pay income contributions from their wages during bankruptcy as the ‘trigger points’ for when you have to start paying income contributions are quite high.

A person with no dependants can take home (earn after tax) $1,024.62 per week and not have to pay income contributions to their bankrupt estate.

Where a person’s income exceeds the ‘trigger point’ or threshold amount, half of each after tax dollar earned above the threshold is to be paid to the bankrupt estate and the other half is retained by the bankrupt person.
The after tax threshold amounts that must be exceeded before income contributions will have to be paid are detailed below. They vary depending on the number of dependants you have:

Income contributions during bankruptcy are calculated based on your income during each ‘bankruptcy year’ and not ‘tax years’. For example, if a person obtained a bankruptcy number on 10 March 2014 the bankruptcy years would be:

No. of dependantsAfter Tax Per Annum Threshold AmountAfter Tax Weekly Threshold Amount
0$55,837.60$1,073.80
1$65,888.37$1,267.08
2$70,913.75$1,363.72
3$73,705.63$1,417.41
4$74,822.38$1,438.89
Over 4$75,939.14$1,460.36

 

Year 110 March 2014 to 9 March 2015
Year 210 March 2015 to 9 March 2016
Year 310 March 2016 to 9 March 2017

It is important to note that bankruptcy income, for the purpose of calculating whether the income exceeds the threshold amount, is not calculated in the same manner as how taxable income is calculated.

Your bankruptcy income will include:

  • Wages and salary from all jobs
  • Tax refunds (except the amount that relates to the pre-bankruptcy year)
  • Taxable fringe benefits
  • Salary sacrifice arrangements
  • Income received from superannuation, annuities and pensions
  • Business profits
  • Loans from associated entities
  • Income you earn which is paid to someone else (including to a company or trust)
  • Superannuation contributions in excess of 9.5% made by an employer that arise from an industrial agreement solely between you and your employer
  • Income earned overseas

Expenses allowed, to determine your bankruptcy income, are expenses required to be paid to earn the income. Non specific expenses that may be allowed by the Australian Taxation Office are not allowed to determine your income under the Bankruptcy Act. Examples of expenses that would not be allowed include:

  • Extra payments to superannuation
  • Discretionary expenditure
  • Depreciation
  • Expenses of a capital nature*

*Expenses are determined on a case by case basis

To be able to claim a person as a dependant and obtain the benefit of a higher income threshold, the dependant must meet the following criteria:

  • Reside with you, and
  • Be wholly or partially dependant on you for economic support, and
  • Not have an income of more than $3,397 per annum

Below are some examples of how an income contribution would be calculated.

a) Tom has no dependants and an after tax income of $50,000 per annum. Tom’s income contribution liability will be:

After tax income$50,000.00
Less:
Income threshold – no dependants$55,837.60
Amount after tax income exceeds threshold$Nil

Tom’s income is less than the threshold. During the first year of bankruptcy, Tom’s after tax income that he retains is $50,000 and he does not have to pay income contributions to his bankrupt estate.

b) James has no dependants and an after tax income of $64,000 per annum. James’ income contribution liability will be:

After tax income$64,000.00
Less:
Income threshold – no dependants$55,837.60
Amount after tax income exceeds threshold$8,162.40
Amount of after tax income over threshold that James retains (50%)$4,081.20
Amount of after tax income over threshold that James is to pay to his bankrupt estate (50%)$4,081.20

During the first year of bankruptcy, James’ after tax income that he can retain is $59,918.80 ($55,837.60 plus $4,081.20)

c) Sue has one dependant and an after tax income of $70,000 per annum. Sue’s income contribution liability will be:

After tax income$70,000.00
Less:
Income threshold – one dependant$65,888.37
Amount after tax income exceeds threshold$4,111.63
Amount of after tax income over threshold that Sue retains (50%)$2,055.81
Amount of after tax income over threshold that Sue is to pay to his bankrupt estate (50%)$2,055.81

During the first year of bankruptcy, Sue’s after tax income that she retains is $67,944.18 ($65,888.37 plus $2,055.81)

d) Peter has 2 dependants and an after tax income of $70,000 per annum. Peter’s income contribution will be:

After tax income$70,000.00
Less:
Income threshold – two dependants$70,913.75
Amount after tax income exceeds threshold$Nil

Peter’s income is less than the threshold. During the first year of bankruptcy, Peter’s after tax income that he retains is $70,000 and he does not have to pay income contributions to his bankrupt estate.

e) Jane has two dependants and an after tax income of $135,000 per annum. Jane’s income contribution liability will be:

After tax income$135,000.00
Less:
Income threshold – one dependant$70,913.75
Amount after tax income exceeds threshold$64,086.25
Amount of after tax income over threshold that Sue retains (50%)$32,043.12
Amount of after tax income over threshold that Sue is to pay to his bankrupt estate (50%)$32,043.12

During the first year of bankruptcy, Jane’s after tax income that she can retain is $102,956.87 ($70,913.75 plus $32,043.12)

Alan Nicholls’ no obligation help desk

Nicholls & Co provide a free, no obligation ‘help desk’ for people considering bankruptcy – we discuss and explain bankruptcy and answer questions for anyone who is considering bankruptcy. The Nicholls & Co help desk can be accessed by phone (1300 060 122) or helpdesk@nichollsco.com.au . Alan Nicholls, Registered Trustee in Bankruptcy is also available to answer your questions to enable you to decide if bankruptcy is right for you.