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Wednesday, 9 February 2005
Page: 21

Senator HUMPHRIES (10:50 AM) —The Bankruptcy and Family Law Legislation Amendment Bill 2004 [2005] is an important move towards consolidating confidence in Australia’s bankruptcy laws. As members have already noted in this debate, it ensures that we progressively look to tightening provisions in both family law and bankruptcy law which permit people to avoid the payment of tax. In this debate, others have suggested that there is quite some way to go before everybody can be confident that all Australians are paying their fair share of the tax burden. Indeed, while laws remain very complex and procedures very involved to prevent the avoidance or evasion of tax, then clearly there will be much industry employed across this country, particularly by lawyers and tax accountants, to discover ways of avoiding those schemes. We need to be one step ahead of that, and I see this legislation as being one way of dealing with that. But I also think it is important to observe that this legislation is about ensuring that, when Australian families are unfortunate enough to be put in the position where they are interacting simultaneously with the bankruptcy laws and the family laws of this country, their position is clarified and the steps that they might take to deal with those situations simultaneously are clear.

This bill looks at the recommendations that were made by the joint task force report on the use of bankruptcy and family law schemes to avoid payment of tax. That task force reported and the Attorney-General took steps to implement key recommendations of the task force through the tabling of a draft bill, which has in turn been considered by the House of Representatives Standing Committee on Legal and Constitutional Affairs. Although Senator Ludwig described as shenanigans the proceedings of that committee, or the steps taken around that committee to progress this draft bill at that time, I note that nonetheless the committee did recommend substantially that at least schedules 2 to 5 of the exposure draft of the bill should proceed. That, indeed, is what is occurring with this piece of legislation.

The bill is designed to ensure that we are able to provide assistance to Australians who are in the position of having to resolve a family breakdown and deal with the settlement of property while at the same time perhaps setting up arrangements for the maintenance of a spouse. The bill is designed to ensure they have the assistance they require to know what they must do and how they must take steps to deal with that situation. At the same time it ensures that the arrangements are robust enough to prevent situations where those circumstances would give rise to tax evasion. It is a sad observation to make that some Australians, even in the midst of a family breakdown and the separation of the two parties, might nonetheless be united in a desire, to some degree, to mutually avoid the obligations they have to the tax man. These measures are designed to minimise the opportunity for them to do that.

As I have said, this bill substantially implements recommendations made in the joint task force report on the use of bankruptcy and family law schemes to avoid the payment of tax. The task force report is useful reading. It is important to acknowledge that it deals with a number of circumstances and, in one sense, that work is not yet completed. There is more to be done to ensure that this area of the law is sufficiently sound to prevent the sorts of situations arising that members have referred to already in this debate.

The government has already acted on some parts of the recommendations of that task force. Amendments were introduced last year to the Family Law Act 1975 to put in place some of those recommendations. The amendments were designed to increase the certainty of standing for third-party creditors to intervene in family law property proceedings and, in certain circumstances, to seek to have some of those orders set aside or overturned. Giving creditors the power to step into those arrangements is an important part of being able to ensure that Family Court proceedings are not used to avoid obligations that lie elsewhere.

The Family Law Amendment Bill 2004, to which I refer, also contains provisions to ensure that financial agreements are not entered into by couples for the purpose of avoiding creditors. This bill takes that process somewhat further. It is focused particularly on the powers and procedures that are available to courts in relation to family property and financial arrangements under the Family Law Act 1975. Perhaps the most significant provision in the bill is contained in schedule 1, which deals with amendments that clarify the rights of the bankruptcy trustee and the non-bankrupt spouse in a marriage and ensures that there is certainty as to the competing rights of those two parties. Clearly, the question of who has first call on the assets of a marriage in the event of a marriage breakdown—creditors or a non-bankrupt spouse—is a complex question and is not, as such, answered by this bill. It is answered, in a sense, by existing family law principles and by provisions made under the bankruptcy legislation.

A problem to date has been the fact that those two sets of laws have been administered by separate courts. We have bankruptcy law being administered in the Federal Court and we have the Family Law Act 1975 being administered in the Family Court of Australia or, in the case of Western Australia, the Family Court of Western Australia, and there has been a limited capacity for each of those courts to consider the jurisdiction of the other. Importantly, this bill creates a kind of cross-vesting arrangement to ensure that, where proceedings are in progress in one of those courts, it is possible for the legal provisions that would govern the operations of the other court to be considered at the same time.

Amendments in schedule 1 allow concurrent bankruptcy and family law proceedings to be brought together in a court exercising, for example, Family Court jurisdiction, to ensure that all the issues dealing with that breakdown are happening at the same time in the same court. It is achieved by giving courts exercising family law jurisdiction the additional capacity to consider bankruptcy matters and to facilitate the involvement of bankruptcy trustees and third-party creditors in family law proceedings. At one level that may not appear to be an appropriate step to take. To have a husband and a wife dealing with the assets of the marriage, or perhaps even the children of the marriage, in court and having their bankruptcy trustees or other creditors present at the bar table, so to speak, may not appear to be desirable in all cases. But it is important that families be able to deal in an effective and efficient way with all of their assets and all of the issues surrounding the breakdown of their marriage.

If they need to approach two courts or go through two processes to do that, or have separate sets of laws apply to their situation in a disjointed way, we run the risk of adding to their distress and contributing to a process which is not desirable. We need to make that process more efficient, and essentially that is what the amendments to schedule 1 of this bill achieve. By merging the courts’ jurisdictions in cases where there is jurisdictional overlay or overlap, the amendments will allow the courts exercising family law jurisdiction to consider, for example, both family law related issues and the non-financial contributions of a non-bankrupt spouse to the acquisition of family property.

There is, as I have said, the other side of the coin in this legislation. As I have said, it is about facilitating processes for parties to a marriage to settle their affairs at the end of the marriage. It is also about being able to ensure that parties who have an interest in the assets of that marriage are not disadvantaged by virtue of the breakdown of the marriage. The other side of that coin in schedule 1, therefore, is that the trustee in bankruptcy can be a party to property or spousal maintenance proceedings in the Family Court. The court will have jurisdiction over property that has become vested bankruptcy property—that is, the Family Court will be able to exercise some say in property which has effectively been covered by or affected by an order under bankruptcy legislation. The court will be able to make an order against a relevant bankruptcy trustee as part of the property adjustment, effectively allowing the trustee to stand in the shoes of the bankrupt spouse.

That obviously provides some certainty. Although it might not in all cases be a welcome intrusion, it provides some certainty to the parties. It offers procedures and protections to a non-bankrupt spouse. They will know where they stand in that event. As well—and this is an important qualification—the court can be on notice about the interests of creditors of a bankrupt spouse and can take those interests into account so that the order that is made at the end of the day does not prevent the legitimate creditors of a bankrupt from obtaining access to assets of the marriage.

Schedule 2 of the bill goes on to establish an enhanced regime for the collection of income contributions under the Bankruptcy Act 1966. At the moment, the Official Receiver can collect contributions to repay outstanding creditors from a bankrupt wage earner’s salary or bank accounts. They can garnishee those. That is an important part of ensuring that there is access to the sorts of income which Senator Murray referred to as too often not reaching creditors. The existing provisions, however, do not always give the bankruptcy trustee or the Official Receiver the kind of access which is necessary to ensure that there is full control over the income of, in particular, a self-employed bankrupt. When a person is employed, it is relatively easy to garnishee their wage or salary. When they are self-employed that is not so easy. So these amendments ensure that it is appropriate and possible for there to be a supervised account regime ensuring that the trustee is able to access all of the bankrupt’s income. Effectively, the order can cover the account into which money is paid, from whatever source, and it is regulated in some way so that a certain amount can be made to reach the bankrupt and a certain amount can be diverted in an even-handed and effective way to meet the legitimate expectations of creditors of one sort or another.

The other two schedules to the bill, schedules 3 and 4, are amended as well in a way that will prevent people from using financial agreements under part VIII of the Family Law Act 1975 to effectively step around the obligations owed to creditors. This is done by ensuring that the existing clawback provisions in the Bankruptcy Act 1966 can be used to recover transfers that are made in bad faith that would have the effect of defeating the interests of creditors. The extent to which this occurs is a matter that we might speculate on. Nonetheless, it is undoubtedly the case that some financial settlements entered into at the end of a marriage do incidentally or deliberately have the effect of avoiding the obligations of parties to that marriage to pay tax or to meet their obligations to creditors. It is important that that not be allowed to continue. So the capacity of parties to a marriage to use financial agreements to prevent the recovery of those sorts of debts is a step taken in this legislation.

The amendments will also create a new act which triggers the operation of bankruptcy laws—a new act of bankruptcy. Where a person is rendered bankrupt or insolvent as a result of a transfer that is made pursuant to a financial agreement, that will amount to an act of bankruptcy. That then allows the bankruptcy trustee access to dispositions of property made after that act of bankruptcy is committed. Clearly, an act of that kind can be characterised as an act designed to avoid legal and financial obligations and, where that occurs, powers should be vested in the bankruptcy trustee to make sure that those assets do not escape the proper administration of such a position as the bankruptcy trustee.

Senator Ludwig, in the course of his comments on this bill, suggested that this was not a serious attempt on the government’s part to deal with the abuse of bankruptcy laws in Australia. It seems to me to be just slightly ironic that, in the midst of debate about legislation designed to prevent people from abusing bankruptcy laws, that kind of comment can be made, but nonetheless I refute it. I think that the government is demonstrating its commitment to ensuring Australians do not avoid their obligations.

Senator Ludwig —It doesn’t go far enough and you know it.

Senator HUMPHRIES —Senator Ludwig insists, obviously, that we have not gone far enough in this legislation, but I note that in his remarks earlier today he failed to mention exactly what further steps the government ought to take. No doubt Senator Ludwig has a gladbag somewhere with wonderful ideas on how Australia can further crack down on the abuse of bankruptcy laws or family laws, but I do not know what those provisions might be and I look forward to him laying out in some way what those provisions might be.

For my part, the government is clearly taking steps to ensure that Australians do meet their obligations. The coalition government does not condone the evasion of tax and will take steps to ensure that Australians who evade their tax are properly prosecuted. If the laws are not tight enough to deal with cases where taxes properly owing are not paid then those laws will be tightened and followed through. The demonstration of that is in the bill before us today. I am very proud and pleased that the government is demonstrating once again that it has the capacity to respond to problems in the administration of our law and bring forward solutions to it in the form that the Bankruptcy and Family Law Legislation Amendment Bill 2004 [2005] represents.