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Wednesday, 9 February 2005
Page: 13

Senator LUDWIG (10:17 AM) —The Bankruptcy and Family Law Legislation Amendment Bill 2004 [2005] will make a number of changes to the Bankruptcy Act 1966 and the Family Law Act 1975. The primary object of the bill is to address issues concerning the interaction between family law and bankruptcy law, which has created uncertainty as to the competing rights of creditors and the non-bankrupt spouse. Labor supports these aims and these changes. Some of these issues now contained within the bill have occupied for some time my time, the Senate’s time and estimates’ time.

The other objects of the bill are to provide a more effective means of collecting income contributions from bankrupts who do not receive their income as a salary or wage, and to prevent the use of financial agreements—that is, in relation to marriage—by bankrupts as a means of avoiding payment to creditors. In particular, those people who are not ordinary PAYE taxpayers have in the past had a greater propensity or capacity to make use of the inadequate interaction between family laws and bankruptcy laws by structuring their affairs in a way which has often left creditors and, of course, the tax office significantly out of pocket.

While the provisions of the government bill are sound to the extent they reach, the bill still fails to address the key bankruptcy controversy that instigated this batch of changes in the first place—that is, the issue of high-income professionals using bankruptcy as a means of avoiding their taxation and other obligations. Year after year, it seems the government has baulked at the very issue it should have addressed. It botched the exposure draft of the bill by hastily preparing provisions that went too far and caught way too many people. It has rightly ditched those far-reaching provisions, but has not managed to replace them with anything adequate and leaves, as a weeping sore, the potential for high-income earners to rort the system. In fact, we know that it was a very small number of people—largely a few barristers, most of them based in Sydney, I understand—who ever used these loopholes, in any event. But there is no excuse for the government failing to draft provisions to catch these people. Even the Liberal Party in its pro-business, pro-entrepreneurial culture should not condone ripping off small business creditors and the tax office.

More particularly, for some time now—right back to the original inquiry that exposed this—between the tax office and ITSA, the Insolvency and Trustee Service Australia, we have at least understood that there were rorts going on. We then ended up with a report that did not provide, in my view, full details about what those rorts were. The explanation was given: ‘We didn’t want to encourage more rorts.’ If they are still continuing, then this government is not fixing those problems. It still remains to this day that some of those rorts, potentially, could be going on. We do not know. It is up to the Insolvency and Trustee Service but, more particularly, this government to manage its legislative program to find out what is going on and then come back with fixes that actually fix the problem. It should not use a scattergun approach or a broad approach to try to solve these things. It is a finite area. It needs considered, good work to track down and ensure that these things are dealt with appropriately.

Labor have also sought to bring forward some amendments to see if we can at least do what the government has failed to do. An earlier exposure draft of the bill was released by the Attorney-General in the weeks after he took on his job. It reflected the usual lack of attention that should have been drawn to this bill. When 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 tabled on 23 July 2004. Even surrounding that though were a number of shenanigans that went on that should not have gone on. I think those shenanigans can be sheeted home to the government side of the House. I do not intend to go into them now, but those who understand what went on will know it was a poor attempt by the Liberals to do some good work. They failed in my view.

What we find is that there were embarrassing inadequacies that were brought forward. The House of Representatives committee recommended that the amendments contained in schedule 1 of the exposure draft relating to tainted property and tainted money be abandoned. These provisions, although intended to cure the evil mentioned above, would have put at risk every legal and proper transaction of many small business owners and professionals over many past years. It is difficult sometimes to say it was poor drafting, because I do not like to blame the parliamentary counsel—the parliamentary counsel works on instructions, and those instructions usually come from the area that is concerned with the bill. So when I use the phrase ‘poor drafting’, it is not referring to parliamentary counsel, because they do a wonderful job. I think that sometimes the problem is that either the department or the agency that then moves the bill forward does not encapsulate what they actually want to achieve or, alternatively—and this is the sad thing that can happen sometimes—the minister or the minister’s office then intervenes and tries to shift the direction from actually fixing the nub of the problem, or sometimes they just miss it and use a scattergun approach. We might never know how it is that these things sometimes end up with a broad based provision like in schedule 1 as it was. Most of the submissions really did highlight the problem again and again. I am not sure if there was not one that did not continue to complain about that schedule 1. Perhaps the only person that did not complain about it in that instance was the Attorney-General’s Department.

The committee recommended that the amendments of the exposure draft bill found in schedules 2, 3 4 and 5 be implemented. In fact, I think most of the submitters were in agreement that there was a problem that should be fixed and should be moved forward. Those matters addressed if not all of the problem then part of the problem.

Turning to the provisions in this bill, the government took the committee’s advice. This bill contains amendments designed to clarify the interaction between family law and bankruptcy. It seeks to address concerns regarding the uncertainty facing both bankruptcy trustees and non-bankrupt spouses when family and bankruptcy proceedings occur concurrently. Under the existing law, different outcomes can arise depending upon the order in which events occur—for argument’s sake, separation, bankruptcy, and distribution of property—which sometimes provides incentives for deception to occur as well, unfortunately. Schedule 1 of this bill sensibly enables concurrent bankruptcy and family law proceedings to be brought together to allow all of these issues to be dealt with at the same time because, of course, sometimes human beings do not work in sequential order and things like this can get out of order. In this instance, at least schedule 1 allows all the issues to be dealt with at the same time as they arise or as unfortunate circumstances befall individuals.

I note that concerns have been raised in some quarters—they were outlined in the House of Representatives committee report—about jurisdictional problems in having the Family Court deal with bankruptcy issues, because the Family Court does not have established expertise in this area. However, the government believes these issues are surmountable and that they are outweighed by the benefits that these changes will make, and an increased reliance on the Federal Magistrate’s Court to deal with both matters should assist. I am sure that in the broader sense, by ensuring that bankruptcy and the division of property in marriage breakdowns can be handled by the 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 parties—are equally and fairly taken into account. The experience I have had through estimates with the Federal Magistrates Service is that they will have the expertise within the overall place or develop it over time to ensure that fair and just outcomes are dealt with.

Of course, it is important that the law is flexible enough to deal with the many and varied circumstances and motives of parties that exist where bankruptcy and marital breakdowns occur concurrently—it is always a sad instance when that occurs—or at relatively similar times. Perhaps I do not need to provide a family history in this, but you can understand how bankruptcy can lead into marital breakdowns or marital breakdowns can lead into bankruptcy—unfortunately, they do seem to be sometimes wedded together, to use an unfortunate phrase. It also ensures that the technical timing of separation or bankruptcy is not a definitive factor which may disadvantage one or the other of the parties—for example, a creditor or a non-bankrupt spouse—and 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 this bill seeks to address the problem whereby some bankrupts, particularly high-income fee-for-service professionals, do not operate bank accounts in their own name. This practice renders the existing contribution and collection scheme ineffective because it is based on a system of garnisheeing—that is, taking out a proportion of a bankrupt’s income from their bank account. The proposed change gives the trustee the power in certain cases to require that a bankrupt pay all of their income into a bank account supervised by the trustee.

The proposed changes also provide for 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. That is dealt with on the proviso that the balance of the account remains sufficient to meet the bankrupt’s contribution amount—in other words, the amount is still sufficient to cover what is required. Decisions made by the bankruptcy trustee will be reviewable—firstly, by the Inspector-General in Bankruptcy and, secondly, by the Administrative Appeals Tribunal—so that the parties’ rights are safeguarded in that respect. 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 choice. It is essential to the integrity of bankruptcy law that the trustee is able to monitor any bankrupt’s 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. They narrow the definition of ‘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. In effect, what people are trying to ensure is that the system can work effectively without disadvantaging parties in other areas. You have to appreciate that a lot of thought has gone into the operation of this and the interaction between family law and bankruptcy—because it is a difficult area—notwithstanding their failing in relation to the earlier provision of schedule 1 that I talked about.

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 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. So they are also trying to work through areas where persons might come up with neat little ways or inadvertent ways of defeating the purpose of the legislation. Labor supports these amendments and hopes they will be effective in preventing the inappropriate use of family law to contrive transactions with an intention to avoid the assets coming under the control of the trustee in bankruptcy. We also hope that between the family law, the relevant ITSA and the courts these circumstances can be monitored and a watching brief continued to see what happens to make sure there is no unfairness in the system, that justice is being done and being seen to be done, that those people who are obviously rorting the system can be singled out and that the system can take into consideration those people who might be unfairly caught by the system and the situation fixed where necessary.

Labor’s amendments go to the rebuttable presumption of insolvency that we will deal with in the committee stage. I will be returning to the notable omission from this bill and Labor’s suggested amendment to remedy it. We do not pretend that our amendments offer the answer to every use or abuse of the bankruptcy system but they seek to tackle an issue the government has failed to address despite extensive opportunity. We understand that the government will now be undertaking yet another consultative process in an attempt to address the anti-avoidance issues that have been raised consistently for the past four years—gosh, it has been that long—but we have a strong doubt about the government’s bona fides in this area given the length of time that has elapsed since they first became aware of this problem and their continued and repeated failure to grapple with it properly. Nearly four years on they are now releasing a discussion paper on this issue. Of course, the Labor Party will cooperate and take a strong interest in this process as we have done over the last four years and will continue to do so. These are important issues and we will continue to pressure the government to address them. But we must place on the record that an appropriate and detailed response should have been developed in response to this problem well before now.

Labor have taken account of the history of this issue and included in its amendments the presumption against the bankruptcy when they have an outstanding tax debt or where they have made a transfer of property but failed to keep adequate records. This is one of the methods discussed by the House of Representatives committee. It will not fix all of the problems but it goes some of the way. With the meagre resources of the opposition we put this forward as a serious improvement to that which the government continues to refuse to address. This amendment would ensure that the person who transfers assets to a third party at or below market value at a time when they proved to be insolvent could have action taken against them in recovering those assets. It will address the problem of high-income tax debtors abusing the present system and hiding behind difficult questions of proof that often face a creditor. Legitimate transfers will not be inappropriately caught—it is only a presumption which they can disapprove—but the evidentiary burden will shift to those who have done the wrong thing and will make it significantly easier for the trustee in bankruptcy to make out their case.

Labor propose that there be a rebuttable presumption of insolvency in certain circumstances—and they are set out in the amendments so I will not go through them in any detail now; we will deal with them in the committee stage. The sensible amendments shift the onus onto the very people whose actions are in question to ensure that these records are accurate and that their obligations to the Australian Taxation Office are fulfilled in the knowledge that if they fail in this regard there will be a presumption of insolvency against them. What flows from this presumption will bring the full weight of the law onto them if they have acted inappropriately while insolvent. Labor’s amendments reduce the evidentiary burden on the trustee in such a way so that again the bankrupt cannot rely on the absence of proper records to avoid scrutiny of particular asset transfers.

Our amendments act where the government has consistently failed to do so. They tackle the operational problems that exist in recovering assets from third parties under sections 120 and 121 of the act. The real difficulty, of course, in recovering assets from third parties who have received a transfer of assets is often not in the principle of the 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 Labor’s amendments were suggested in several submissions to the House of Representatives inquiry into the poorly constituted exposure draft bill of the government, and these changes were viewed favourably by the committee.

By failing to adequately consult and develop a workable position on this matter the first time round and then failing to address this operational problem in the existing act through simple amendments, the government has ignored moderate and sensible changes that would have addressed legitimate problems in the existing law. Labor’s amendments are an appropriate additional step that can and should be taken in making these changes, and they are appropriate to the problem they seek to resolve. Labor are willing to support the other measures in the bill. We do, however, urge the government to support Labor’s amendments, which will further strengthen the law and tighten some of those loopholes which have allowed some high-flyers in the community to avoid tax or other obligations.