What Can I Earn and Keep? – Income During Bankruptcy

How Much Can a Bankrupt Earn?

Bankrupts are required to pay half of their after tax income that exceeds a statutory threshold amount to their Trustee in Bankruptcy.

Assessed Income – Threshold Amount   = Contribution Payable


bankrupt income



The threshold amount varies depending on the number of dependants as detailed here (AFSA Indexed Amounts).

To qualify as a dependant the person is required to reside with you and earn less than $3,459 (Indexed).

Where the bankrupt is separated and the dependant resides with the bankrupt on a part time basis, an assessment will be made on a case by case basis as to whether they count as a dependant.

Assessed Income

Assessed Income can include, but is not limited to the following:

  • Wages & Salary
  • Tax Refunds – that relates to the post bankruptcy period & have not been offset by the ATO against outstanding pre appointment debt. (Tax Refunds that relate to the time period prior to bankruptcy are classed as an asset and vest in the bankrupt estate)
  • Taxable fringe benefits – examples include the use of someone else’s motor vehicle
  • Salary Sacrifice Agreements including excess superannuation contributions
  • Superannuation receipts, annuities & pensions (not lump sums)
  • Loans from associated entities
  • Income you earn that is paid to someone else (including a company or trust)
  • Fringe Benefits provided to the bankrupt, as detailed above, are assessed as income, however there a number of notable exceptions:
    • Education expenses paid in respect of the child of the bankrupt
    • Lodging or the occasional use of a motor vehicle for domestic purposes up to the value of $250 per week that is provided by a spouse, parent, child, brother or sister of the bankrupt.

Deductions from Assessed Income

Deducted from assessed income is income tax payable as well as expenses incurred to generate your income – this can differ from allowable deductions in your tax return.

Payments made to the Child Support Agency or pursuant to a Family Court Order are also deducted from your assessed income.

Alienation of Income

It is not uncommon for a bankrupt to be employed by a company that his spouse is the sole director and shareholder of. (Bankrupts are prohibited as acting as a company director). In these circumstances the spouse has the capacity to pay a set wage to the bankrupt and pay themselves a wage to reflect the value of their work.  Often we see that the bankrupts wage is coincidentally just under the allowable income threshold. In these circumstances the trustee has the ability to determine the assessable income that would be reasonable income in the circumstances. Such an assessment would reflect the industry average or market value of the work ensuring that the bankrupt’s personal exertion required to generate the income is properly remunerated and the income is not diverted to a passive spouse.

Income Assessment

The trustee will make an assessment each year, (Contribution Assessment Period), based on projections of expected income. Note that the Contribution Assessment Period commences on the date of bankruptcy, it is not a financial year.

Contributions are then usually paid on a periodic basis in line with the bankrupt’s wage payments, e.g. monthly / fortnightly / weekly, to help with the bankrupts cash flow.

At the end of the contribution assessment period, the trustee will compare actual income to the projected income.

Where overpayments are found to have been paid as a result of the reassessment, they will be credited to future year’s contributions. If there are no future years overpayments can not be refunded.

The bankrupt is required to comply with the trustees request for information to enable an assessment to be conducted on his / her income. Failure to do so can result in penalties.

The trustee also has the power to obtain information from associated entities in respect of the bankrupt’s income.

Consequences for Non Compliance

If a bankrupt fails to comply with an Income Assessment there are consequences, which include:

  • Objecting to the automatic discharge from bankruptcy, resulting in the period of bankruptcy being extended by five years, from three to eight years.
  • Issuing a Garnishee notice to the bankrupt’s employer.
  • Prohibit the bankrupt from travelling overseas.
  • Obtaining a judgement for unpaid contributions and taking enforcement action after the bankrupt is discharged.

If a bankrupt disagrees with an assessment, at first instance they should contact their trustee. If still dissatisfied the bankrupt can within 60 days of being notified of the assessment, request a review of the trustee’s decision by the Inspector General. If still dissatisfied they can apply to the Administrative Appeals Tribunal.

Hardship Applications

The Bankruptcy Act provides specific provisions that would allow for an adjustment to be made where excessive expenses would impose a financial burden. These are:

  • Ongoing medical expenses – for the bankrupt and dependants – dogs are not a dependant!
  • Cost of child day care essential to work.
  • Particularly high rent when there are no alternatives available – A bankrupt who leases a penthouse in the city has alternatives!
  • Substantial expenses of travelling to and from work.
  • Loss of financial contributions, usually made by your spouse, to the costs of maintaining your household.