Bankruptcy – Income Contributions & Salary Packaging

People who pay income contributions to their bankrupt estate, often have their salary packaged to achieve a tax benefit.

The most common forms of salary packaging are salary sacrifice for a novated lease, superannuation and/or a motor vehicle fringe benefit.

It is important to note that your tax liability is derived from your taxable income, whereas your obligation to pay income contributions to your bankrupt estate is determined from your after-tax income.

Salary packaging works to reduce your taxable income, causing you to pay less tax and increase your after-tax income. Here is the dilemma: by increasing your after-tax income, the salary packaging increases your obligation to pay income contributions during bankruptcy.

Attached are some worked examples to determine the impact of salary packaging on the income contribution liability.

For people who have their bankrupt estate administered by Nicholls & Co, we highly recommend, if you are considering salary packaging, that you first run the numbers past us. This will allow you to get across the effect that salary packaging will have on your income contribution liability. That way you can make an informed decision on whether you wish to proceed with salary packaging.

More information about income during bankruptcy is available on this website or by calling Alan Nicholls on 1300 060 122.

Income Assessment – nil fringe benefit
Income Assessment based on an annual salary of $90,000.00 received fortnightly and nil dependants.

Estimated Income for Contribution Assessment Period (CAP)

Gross Income: $ 90,000.00
Less Tax: ($ 22,732.00)
Net Income for Assessment: $ 67,268.00
Less Actual Income Threshold Amount (AITA): $ 55,837.60
Excess income: $ 11,430.40
50% available as income contributions: $ 5,715.20
Fortnightly income contributions: $ 219.82

Income Assessment including fringe benefit – MV
A motor vehicle provided by employer nominal value $40,000.00 for use by employee (work and private).

Estimated Income for Contribution Assessment Period (CAP)

Gross Income: $ 90,000.00
Plus, Fringe Benefit – MV: $ 8,000.00
Less Tax: ($ 22,732.00)
Net Income for Assessment: $ 75,268.00
Less Actual Income Threshold Amount (AITA): $ 55,837.60
Excess income: $ 19,430.40
50% available as income contributions: $ 9,715.20
Fortnightly income contributions: $ 373.66

Income Assessment – nil salary sacrifice
Income Assessment based on an annual salary of $90,000.00 received fortnightly and nil dependants.

Estimated Income for Contribution Assessment Period (CAP)

Gross Income: $ 90,000.00
Less Tax: ($ 22,732.00)
Net Income for Assessment: $ 67,268.00
Less Actual Income Threshold Amount (AITA): $ 55,837.60
Excess income: $ 11,430.40
50% available as income contributions: $ 5,715.20
Fortnightly income contributions: $ 219.82

Income Assessment including salary sacrifice – novated lease
Income Assessment based on an annual salary of $90,000.00 received fortnightly and nil dependants.
Bankrupt salary sacrifices: $400.00 per fortnight for novated lease of motor vehicle.

Estimated Income for Contribution Assessment Period (CAP)

Taxable Income (after salary sacrifice): $ 79,600.00
Plus, Salary sacrifice ($400.00 per f/n): $ 10,400.00
Gross Wage for Assessment: $ 90,000.00
Less Tax: ($ 19,009.00)
Net Income for Assessment: $ 70,991.00
Less Actual Income Threshold Amount (AITA): $ 55,837.60
Excess income: $ 15,153.40
50% available as income contributions: $ 7,576.70
Fortnightly income contributions: $ 291.41

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.