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Thursday, 17 February 2005
Page: 32


Ms ROXON (11:10 AM) —I thank the Attorney-General for dealing with this bill, which has already been introduced in the other place. The Bankruptcy and Family Law Legislation Amendment Bill 2005 will make a number of changes, as the Attorney has set out, to the Bankruptcy Act 1966 and to the Family Law Act 1975. The primary object of the bill is to address issues concerning the interaction between family law and bankruptcy which have created uncertainty as to the competing rights of creditors and the non-bankrupt spouse. Labor supports these aims and these changes.

The other objects of this bill are to provide a more effective means of collecting income contribution from bankrupts who do not receive their income as a salary or wage, and to prevent the misuse of financial agreements in relation to marriage by bankrupts as a means of avoiding payment to creditors. In particular, those who are not ordinary PAYE taxpayers have had in the past a greater propensity or capacity to make use of the inadequate interaction between family and bankruptcy laws to structure their affairs in a way that often left creditors and the Australian Taxation Office significantly out of pocket.

Whilst these provisions of the government's bill are sound to the extent that they reach, the bill still fails to address one of the key bankruptcy controversies that instigated a whole round of changes in the bankruptcy field in the first place—that is, the issue of high-income professionals using bankruptcy as a means of avoiding their taxation and other obligations, often by the manner in which they ordered their family affairs. Whilst the changes that are before us today are significant, the Labor Party is concerned that, year after year, the government has baulked on the very issue that we believe it should have been pursuing. It botched the exposure draft of an original bill by hastily preparing provisions that went way too far and caught out way too many people. It has rightly ditched those too far-reaching provisions but has not managed to replace them with anything adequate, and it leaves as a weeping sore the potential for high-income earners to continue to rort the system.

We do know that it is only a small number of people, and most of the media coverage has been focused on a number of Sydney barristers, who have ever used these loopholes. But there is no excuse from our perspective for the government failing to draft provisions which will catch these people. Even the Liberal Party in its pro-business, pro-entrepreneurial culture surely does not condone the ripping off of small business creditors, other family members or the tax office. I will come later to amendments that the Labor Party moved in the other place and which now form part of the bill as it has come to the House. These amendments do take a step in the right direction in protecting others from the acts of those high-income individuals.

An earlier exposure draft of this bill, as I have mentioned to the House, was released in October 2003 by the Attorney only a few weeks after he took on the job as Attorney-General. When its apparent weaknesses were quickly pointed out, he referred the bill to the House of Representatives Standing Committee on Legal and Constitutional Affairs for comment. The committee received 174 submissions, and its report was presented on 23 July 2004. The House of Representatives committee recommended that the amendments contained in schedule 1 of the exposure draft, relating to tainted property and tainted money, should be abandoned. These provisions, although intended to cure the evil that I have mentioned above, would have put at risk every legal and proper transaction of many small business owners and professionals over many past years. The poor drafting of these provisions simply made them too wide, and they would not have been able to be accepted in this place.

The committee recommended that the amendments to the exposure draft bill found in schedules 2, 3, 4 and 5 be implemented. The government took the committee's advice to remove the offending sections but did not take on all of the committee's other comments and suggestions about how this issue could be dealt with more properly.

This bill contains amendments designed to clarify the interaction between family law and bankruptcy, as we have said. It seeks to address concerns regarding the uncertainty facing both bankruptcy trustees and non-bankrupt spouses when family law and bankruptcy proceedings occur concurrently. Under the existing law, different outcomes can arise depending on the order in which events occur—whether separation occurs first or bankruptcy and the distribution of property—and sometimes on the order in which litigation is commenced in those different areas, which can sometimes provide incentives for deception to occur. Schedule 1 of this bill sensibly enables concurrent bankruptcy and family law proceedings to be brought together to allow all issues to be dealt with at the same time.

I note that concerns have been raised in some quarters. These concerns were outlined also in the House of Representatives committee report about jurisdictional problems in having the Family Court deal with bankruptcy matters and the fact that the Family Court does not have an established expertise in this area. However, we have been assured by the government that it believes that these issues are surmountable and are certainly outweighed by the benefits that these changes will make, but it is a matter that will need to be monitored. Of course, an increased reliance on the Federal Magistrates Court that deals with both jurisdictions should certainly help this issue.

By ensuring that bankruptcy and the division of property in a marriage breakdown can all be handled by one court together, appropriate orders can be made so that the interests of all parties to the proceedings—the bankrupt, the non-bankrupt spouse and any creditors or other third party—are equally and fairly taken into account. This is important so that the law is flexible enough to deal with the many and varied circumstances and motives of parties that may exist where bankruptcy and marital breakdown occur concurrently or closely together.

It also ensures that the technical timing of separation or bankruptcy is not a definitive factor which may disadvantage one of the parties—for example, a creditor or a non-bankrupt spouse. The provisions remove the incentive for people to use family law proceedings inappropriately as a means of protecting family assets that might otherwise be available.

Schedule 2 of the bill seeks to address the problem where some bankrupts, particularly high-income fee-for-service professionals, do not operate bank accounts in their own names. This practice renders the existing contribution collection scheme ineffective but, of course, is based on a system of garnishing a proportion of a bankrupt's income from their bank account. The proposed changes give the trustee the power in certain cases to require the bankrupt to pay all of their income into a bank account supervised by the trustee.

The proposed changes also provide for an agreement to be reached between the trustee and the bankrupt on certain matters, such as withdrawals from the account to meet the bankrupt's living expenses or additional withdrawals to meet unexpected liabilities, on the proviso that the balance of the account remains sufficient to meet the bankrupt's contribution amount.

Decisions made by the bankruptcy trustee will be reviewable first by the Inspector-General in Bankruptcy and then by the Administrative Appeals Tribunal. Labor supports these measures to ensure that the obligations of a bankrupt to their creditors cannot be circumvented simply by a quirk of their accounting procedures and banking choices. It is essential to the integrity of bankruptcy law that the trustee is able to monitor any bankruptcy income to ensure that all available money is returned to creditors.

Schedules 3 and 4 contain changes that also go to the interaction between family law and bankruptcy by narrowing the definition of a maintenance agreement under the Bankruptcy Act to prevent individuals from using other contractual arrangements, namely financial agreements involving marriage under part VIIIA of the Family Law Act, to defeat the claims of creditors. Of course, maintenance agreements under part VIII will not be affected, including the liability of one party to a marriage to maintain the other under section 72 of the Family Law Act.

The aim of these provisions is to ensure that a potential bankrupt does not push himself or herself into bankruptcy by the very act of transferring valuable assets to their spouse or former spouse under one of these agreements. These provisions will also introduce a new act of bankruptcy that will occur when an individual is rendered insolvent as a result of assets being transferred under a financial agreement.

The government also introduced in the other place some additional amendments to this bill. The provisions were originally included in part 19 of the Family Law Amendment Bill 2004, which was introduced into the parliament on 1 April 2004. The inquiry of the Senate Legal and Constitutional Legislation Committee into the original bill unanimously supported the provisions that have now been inserted into the bill that is before us today.

The government did not proceed with the passage of that bill last year and has now chosen to incorporate into the current bill those part 19 amendments which attempt to prevent concocted financial agreements or marriage breakdown being used to avoid obligation to creditors. It also includes a provision to entitle a third party to become a party to proceedings where their interests may be affected.

The provisions require parties to sign a separation declaration stating that there is no reasonable likelihood of them resuming cohabitation. It is aimed at protecting the rights of third-party creditors by preventing debtors who are otherwise in ongoing marriages from transferring assets to their spouses by way of sham transactions or sham separations designed to defeat the interests of genuine creditors.

We note that the additional amendments moved by the government in the other place also include a minor clarification to section 79F which was not included in the original form of this bill. It now incorporates a suggestion by the Law Council of Australia which was unanimously supported by the Senate committee in its report on the Family Law Amendment Bill 2004.

Certainly all of these changes might sound technical, but we would like to put on the record that the government informed the opposition of its intention to move these amendments in the other place only on the day that the amendments were to be moved. It turned out that, given the Senate's business, it was actually a day later. While we accept that these are provisions which have previously been introduced, it is unacceptable to us—and inexplicable, it seems—that the government should not be able to provide the opposition with reasonable notice of its intentions, especially when both bills have been around and have been debated and examined for such a long time.

If we, the opposition, with our meagre resources, are able to provide amendments that we intend to move to the government some months before we do so, particularly as was the case in this area, you would think that the government could also find a way to assist the opposition by giving us sufficient notice for dealing with these matters. To us, it is just another indication of the government's complete mismanagement of this entire issue and its inability to develop a comprehensive strategy to address the relationship between family law and bankruptcy and the related anti-avoidance problem. To date, all that it has presented to parliament is a piecemeal strategy, and the way these last-minute amendments have been tacked on is just another demonstration of this.

Despite this, of course, Labor are not going to be churlish and will support the new amendments as part of this bill, given that they do have merit to them. In addition, Labor's amendment on the rebuttal of presumption of insolvency, which was moved in the Senate last week, now stands part of this bill as it was passed and we are debating it today. We believe that this amendment makes this bill a better piece of legislation.

Labor have taken account of the history of this issue, and under our initiative the Senate passed an amendment which includes a presumption against the bankrupt when they have an outstanding tax debt or where they have made a transfer of property but failed to keep adequate records. It is simply unacceptable to us—and I am pleased that the member for Lowe is here because it is something that he has pursued vigorously for many years—that high-flyers can fund an extravagant, profligate lifestyle, be able to avoid their obligations to the Taxation Office and to creditors and be living at the expense of the rest of us.

Our amendment was one of the methods that were discussed by the House of Representatives committee last year to deal with this issue. We understand that it will not fix all of the problems that have been identified, but it does go some of the way and it is an improvement on what the government has achieved so far. If the opposition, with our meagre resources, can put this amendment forward as a serious improvement, it seems to us that if the government fails to support it then it is not truly committed to addressing this issue.

From discussions with the Attorney-General's office, I know that later an amendment will be moved here to exclude Labor's proposal in this area, which I think is extremely disappointing. The government, when this amendment was due to be debated in the Senate last week, announced that it was going to put out yet another discussion paper and it wants to deal again with this issue and get more feedback. It says that it would like to deal with it comprehensively, and therefore will not support an amendment which may go only part of the way to improving the situation. But it seems to me that no-one has been able to provide a decent reason why our amendment would cause any damage. Even the Attorney-General, in question time last week, indicated that it will go part of the way to fixing the problem that we are all aware of. Given that the rest of the government's strategy in dealing with bankruptcy and family law matters is piecemeal, we do not understand why taking this step at this point in time is proving so difficult for the government.

Our amendment, which now stands part of the bill, was moved by the Labor Party and passed by the Senate. It provides that a person who transferred assets to a third party at or below market value at a time when they were proved to be insolvent could have action taken against them in recovering those assets. It would address this problem that has been identified of high-income tax debtors abusing the present system and hiding behind the very difficult questions of proof that often face a trustee or creditor. Legitimate transfers will not be inappropriately caught, as it is a presumption which they can disprove, but it will shift the evidentiary burden onto those who have done the wrong thing and make it significantly easier for the trustee in bankruptcy to make their case.

Our changes to the bill mean that the legislation before us today will provide a rebuttable presumption of insolvency in circumstances where either (a) the bankrupt has made a transfer of property while at the same time having an outstanding tax return or (b) the bankrupt has made a transfer of property and has failed to keep adequate books, accounts and records in accordance with their obligations.

This sensible amendment, which was moved in the Senate and which stands part of the bill we are debating now, shifts the onus onto the very people whose actions are in question to ensure that their records are accurate and their obligations to the tax office are fulfilled, in the knowledge that if they fail in this regard there will be a presumption of insolvency against them. This presumption will bring the full weight of the law onto them if they have acted improperly while they were insolvent. We believe that our improvements to this bill reduce the evidentiary burden on the trustee in such a way that the bankrupt cannot rely on the absence of proper records to avoid scrutiny of particular asset transfers.

Our changes to this bill take action where the government has consistently failed to do so. I urge it to accept the form of the bill that the Senate has sent down to this place to be dealt with. We believe the bill as it stands tackles some of the operational problems that exist in recovering assets from third parties under section 120 and section 121 of the act. The real difficulties in recovering assets from third parties who have received a transfer of assets are often not the principles of law but can concern evidentiary issues—that is, showing that assets were transferred to avoid them coming under the control of the bankrupt's trustee. These may, for example, be in circumstances where their account and record keeping has long since disappeared.

Changes consistent with the amendments Labor moved in the Senate were suggested in several submissions to the House of Representatives inquiry into the poorly constituted exposure draft of the government. These changes were viewed favourably by the committee. I am advised that the government will oppose these amendments and vote against them in the House. In moving these amendments in the other place we did not pretend that our amendments offered the answer to every use and abuse of the bankruptcy system, but they do seek to tackle an issue that the government has failed to address despite extensive opportunities over what is now more than four years. You would think that the government would see this as an opportunity to improve the ability of the government to prevent high-income earners avoiding their tax and credit obligations.

I have already flagged that we understand that the government will now be undertaking yet another consultation process in an attempt to address these anti-avoidance issues that have been raised consistently for four years. But we have to put on the record that we have strong doubts about the government's bona fides in this area, given the length of time that has elapsed since it first became aware of this problem and its continued and repeated failure to grapple with it properly. Nearly four years on, we now have the government releasing a discussion paper on the issue.

Of course the Labor Party will cooperate with this discussion and consultation process and take a strong interest in the outcome of the consultations the government undertakes. These are important issues and, even if the government were to accept the improvements to our bills today, there are other issues that would still need to be dealt with. We urge the government to take them seriously and to act quickly, thoroughly and properly in this area so that changes can be made to our system which will ensure that these loopholes are comprehensively closed.

We will continue to pressure the government to address these issues; but, as I have said, we must place on the record that an appropriate and detailed response to this problem should have been developed well before now. By failing to adequately consult and develop a workable position on this matter the first time around, and then failing to address this operational problem existing in the act through simple amendments such as those that we have suggested, the government has ignored moderate and sensible changes that would either address or partially address a legitimate problem in the existing law. Labor's proposals are an important additional step that can and should be taken in making these other changes that are before the House today and are proportionate to the problems that they seek to resolve. During question time last week, the Attorney even conceded that Labor's amendments would assist. He criticised our amendments for not going far enough but said that they would `go part of the way to resolving the issues'. This seems to me a good argument for the government to be voting for the bill as it now stands before the House. It is a sensible improvement on that which was originally introduced, and I urge the government to support it. It will further strengthen the law and tighten some of the loopholes which have allowed some high-flyers to avoid their obligations to others in the community and to the tax office. We should be taking all steps to prevent that sort of avoidance at every possible opportunity. I commend the bill in the form that it now stands to the House.