Editors --- "Family tax benefit debt: effect of bankruptcy" [2007] SocSecRpr 49; (2007) 9(4) Social Security Reporter, Article 7

• SECRETARY TO THE DFaCSIA and PARKER
• Background
• Write Off/Waiver
• Bankruptcy

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Family tax benefit debt: effect of bankruptcy

SECRETARY TO THE DFaCSIA and PARKER

(2007/1834)

Decided: 4th October 2007 by J. Handley

Background

The Secretary applied for review of a decision made by the SSAT on 13 June 2007. The SSAT had decided that only part of a debt owed by Parker was repayable by reason of Parker having entered into bankruptcy prior to the debt having been raised.

Parker, the mother of two children, had at all relevant times from a date in 2001 been entitled to and paid family tax benefit (FTB). After the parents separated Joint Consent Orders were entered into by Parker and the children’s father on 23 April 2004. She and the father agreed to have joint responsibility for the long term care, welfare and development of both children. The order also permitted specified periods of access by the father to the children. Centrelink forwarded recipient notices to Parker which obliged her to notify Centrelink of changed circumstances, one of which was changes in shared care.

In December 2006 a debt of$4089.05 was raised against Parker for the period July 2004 to December 2006because it was alleged that she did not notify Centrelink of the shared care arrangement between herself and the children’s father which had been calculated at 83/17 per cent.

Centrelink calculated the amount that would have otherwise been payable had a disclosure been made and determined that had Parker been paid at all relevant times at 83 per cent of the FTB rate, the sum of $4089.05 would not have been paid. Centrelink sought to recover that sum.

Parker voluntarily entered bankruptcy on 21 December 2004. She previously had given an undertaking as guarantor for a friend with respect to a $25,000 loan. Her friend defaulted on that loan and the lending authority sought recovery of monies from her pursuant to the guarantee. She was unable to meet that liability and accordingly applied for bankruptcy. The date of her discharge from bankruptcy was to be 20 December 2007.

Write Off/Waiver

The AAT considered the applicability of the write off/waiver provisions of the A New Tax System(Family Assistance) (Administration) Act 1999 (the Administration Act) to the circumstances.

Section 71(2) of the Administration Act provides that if an amount of FTB has been paid to a person and the amount paid is greater than the amount that should have been paid, the difference between those amounts is a debt due to the Commonwealth.

Section 95 of the Administration Act concerns the authority of the Secretary to write off a debt but only in the circumstances that; the debt is irrecoverable, that the debtor has no capacity to repay, that the debtor’s whereabouts are unknown and it is not cost effective for the Commonwealth to recover the debt. With respect to the debt being irrecoverable at law, a number of circumstances are contained in s.95 (3).

Bankruptcy is referred to at s.95 (3) (c) as a circumstance where a debt may not be recoverable at law; but only where the debtor is discharged from bankruptcy, the debt was incurred before the bankruptcy and it was not incurred by fraud. That circumstance had no application to the facts of these proceedings.

Section 96 of the Administration Act deals with debt waiver. Section 97(1) provides that a debt may be waived if it arose from error attributable solely to an administrative error made by the Commonwealth but only in the circumstances found at s.97 (2) or (3). Section 97(2) provides that the proportion of the debt attributable to administrative error must be waived if it was received in good faith and severe financial hardship would be suffered if it is not waived. Section 97(3) also refers to receipt of the proportion of the debt attributable to administrative error. Whilst finding Parker would suffer financial hardship if the debt were not waived it appeared to Mr Handley that she turned a blind eye to ascertaining whether in fact the rate that was being paid was the correct amount and in those circumstances the payments were not received in good faith. He referred to the discussion of good faith by Weinberg J in Pledger and Secretary, Department of Family and Community Services (2002) FCA 1576 at paragraphs54 – 59.

Section 101permits the Secretary to waive the debt or part of the debt if it did not result wholly or partly from the debtor knowingly making a false statement or false representation or failing to comply with a provision of the family assistance law, there are special circumstances that make it desirable to waive and it is more appropriate to waive than write off the debt or part of the debt.

Whilst Parker did not make a false statement or a false representation, Mr Handle found she did not comply with a provision of the family assistance law because she failed to notify Centrelink that payments were being made at the full rate and because there was a failure to comply with a provision of the family assistance law, special circumstances other than financial hardship alone were precluded from his consideration.

Bankruptcy

The SSAT had decided that FTB payments in excess of 83 percent paid between 1 July 2004 and 20 December 2004 (the day before the entry into bankruptcy) were a recoverable debt against Parker. It also decided that payments made during the period of bankruptcy, that is, between 21 December 2004 and 25 December2006, were beyond the ambit of ss.70 and 71 of the Administration Act and the amount of the overpayment during the latter period (21 December 04 - 25 December 06) was only provable through a claim made to the Official Receiver.

The Secretary contended that the amount overpaid constituting the debt was not provable in bankruptcy and therefore being outside the scope of the bankruptcy, was recoverable in its entirety.

Section 82 (1) of the Bankruptcy Act 1966 (the Bankruptcy Act) provides as follows:

(1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.

The Secretary also contended that the amount overpaid, the debt, arose by reason of a reconciliation undertaken by the Secretary pursuant to s.105 of the Administration Act whereby at the Secretary’s own volition, the decision to make payments at a certain rate were reviewed. Consequently, an overpayment was found and the debt was raised. The entitlement to review decisions by the initiative of the Secretary is unique to the Administration Act.

The AAT noted that this is to be contrasted with s.1223 (1) of the Social Security Act1999 where a debt is taken to arise when a person obtains the benefit of a payment to which they were not entitled. Section 105 of the Administration Act gives the Secretary the power to make a decision creating a debt irrespective of when the payment was made which gave rise to the debt. In the present case the calculation of the debt occurred in December2006 and was affirmed by the ARO in March 2007. Relevantly the debt arose by the process of calculating the overpayment and the debt was found to exist only then. Whether the relevant date was taken as December 2006 or March 2007, it was on an occasion after Parker entered into bankruptcy. Parker was not subject to that debt at the date of the commencement of her bankruptcy, nor did she become subject to that debt before the discharge of bankruptcy by reason of an obligation which she incurred before the date of the bankruptcy.

The AAT referred to the discussion of s.105 of the Administration Act and s.82 of the Bankruptcy Act by Deputy President Purvis in Secretary, Department of Families, Community Services and Indigenous Affairs and Pollock (2006) AATA 635 (Pollock) at par 40:

The Tribunal is satisfied that a section 105 reconciliation is necessary before a debt can be said to have arisen. There is not an obligation imposed upon a recipient under the family assistance law until the reconciliation exercise is carried out and the result reveals that the recipient is a person not entitled to an amount previously paid, which amount then constitutes a debt owing to the Commonwealth (sections 71(2) and 71C of the Administration Act).

DP Purvis relied upon another decision of the Tribunal, in Secretary, Department of Family and Community Services and Tough (2002) 71 ALD 458 (Tough) where at par 40 of that decision the Tribunal decided that a decision under s.105 can be substituted for a previous decision thereby affecting the rate of FTB paid after the date of the original decision. At par 41 in Tough it was decided:

In using his power under s105 to review a determination that Mrs Tough was not entitled to FTB, it is proper for the Secretary to consider her eligibility and to do so in light of facts that had happened up to the date of his decision if those facts affected her eligibility on or after 1July 2001.

The AAT adopted the methodology and analysis contained in Pollock at pars 22 and 23 which are reproduced in his Reasons for Decision as follows:

22 Nor is there a contingent debt, for there may have been an underpayment in which event Centrelink would be liable to make payment to the recipient. There is not prior to ascertainment of an amount being owed any existing obligation out of which a liability to pay an amount will or could arise in the future (see Community Development Pty Limited v Engwirda Construction Co [1969] HCA 47; (1969) 120 CLR 455 at 459). Factors, it is said, which determine whether a debt is provable in a bankruptcy for present purposes as detailed in Health Insurance Commission v Trustee in Bankruptcy of the Estate of Ioakim Alekozoglou (2003) FCA 848 at para 50, are:

• A debt need not be due and payable at the date of bankruptcy to be provable in the bankruptcy, but there must be an obligation upon which the debt is founded, being an obligation which was incurred before the time of bankruptcy: Jones as Trustee of the Bankrupt Estate of Graham v Deputy Commissioner of Taxation(1998) 157 ALR 349 at 354;

• For a debt to be ‘contingent’, ‘there must be an obligation upon which the contingency can operate’, being an obligation which ‘must exist as at the date of bankruptcy’: Lyford v Carey (1985) 3 ACLC 515 at 518;

• Where discretion is required to be exercised in a way which impacts on or is relevant to a debt there is no obligation to pay until the discretion is exercised: Lyford (supra) at 519.

• For a debt to be provable in bankruptcy there must be: ‘... existing circumstances which (give) rise to a contingent debt or liability, and which would crystallise by the happening of some future event’: Gaffney commissioner of Taxation (1998) 81 FCR 574 at 578;

• A contingent liability within section 82 of the Bankruptcy Act can include a potential liability arising from an obligation: Lofthouse v Commissioner of Taxation(2001) [2001] VSC 326; 164 FLR 106; and

• ‘The questions for determination must be decided by reference to the language of the relevant statutes, rather than by resort to consequences which ... would appear to produce injustice ...’: Kavich; Kavich v Official Trustee in Bankruptcy (1995) 58 FCR 82 at 86-87.

23 Further as was stated in Alekozoglou (supra) at para 51 ‘an obligation must be a recognisable one created by law and must not be some amorphous vulnerability to a possible debt’. There must be an existing obligation owed by the recipient at the time of the bankruptcy even if quantification is to occur at a later date.

Parker’s debt had arisen only on the occasion of the making of a decision unders.105. That occurred after commencement of bankruptcy. Prior to the date of bankruptcy, there was no debt or liability which was then present or having a future likelihood which was certain or contingent by reason of an incurred obligation. She had no liability for the debt until such time as the reconciliation was initiated and completed by the Secretary under s.105. Accordingly, the debt that had been raised following the s.105 reconciliation was not a debt provable in bankruptcy.

Formal decision

The decision of the SSAT insofar as it distinguished liability for payment for the period before and after the commencement of bankruptcy was set aside. In substitution for that part of the decision it was declared that the whole of the debt (to be recalculated by the Secretary in light of the Tribunal’s further findings) was not provable in Parker’s bankruptcy.

The remaining parts of the SSAT decision under review by the proceedings were otherwise affirmed.

The AAT observed that it was in evidence during the hearing that the children’s father had not been exercising his rights of access pursuant to the Magistrates’ Court Order and accordingly there had not been a consistent 83/17 per cent division of shared care.

Prior to December 2006 (being within the period during which the debt in this case was calculated), Parker said there were a number of occasions where access was not exercised by the father pursuant to the terms of the Order at the Magistrates’ Court or at all.

The AAT accepted the truth of that evidence and directed the amount of the overpayment should be recalculated and the debt varied to take account of those occasions where access was not exercised.

[I.T.]