Collection of realisations and interest charges

1. Introduction

   1. This practice document provides practitioners an outline of realisations and interest charge and guidance on how these charges are calculated, with supporting examples.

   2. The realisations charge

   3. The realisations charge is a levy imposed by the government to fund the cost of certain activities undertaken by AFSA that benefit the personal insolvency system.  These include the regulation of the personal insolvency system, investigation and prosecution of breaches of personal insolvency law and enquiries to estates being administered by the Official Trustee where potential assets or offences appear to be involved.
   4. The realisations charge is payable on receipts in bankruptcies, post-bankruptcy compositions (section 73 of the Bankruptcy Act 1966), controlling trustee authority administrations and personal insolvency agreements (Part X), insolvent deceased estate administrations (Part XI) and debt agreements (Part IX).
   5. The rules that govern how the charge is calculated are contained in the Bankruptcy (Estate Charges) Act 1997 (“the Estate Charges Act”).
   6. Certain deductions within an administration are permitted, such as payments to secured creditors.  Other types of receipts, for example creditor indemnities, may not attract the levy.
   7. The total amount upon which the levy is calculated is also limited to the amount that is required to pay all the costs and debts of the administration.  Part 3 below provides examples that illustrate how the realisations charge is calculated in various situations, including where realisations exceed the amount required to pay costs plus debts.
   8. The realisations charge rate is presently 7%.  The rate is set by a Determination, which is currently the Bankruptcy (Estate Charges) (Amount of Charge Payable) Determination 2015, and it is reviewed periodically.  The rate is published on the Fees and charges page of the AFSA website and practitioners are advised of any rate change prior to the date the change takes effect.  Historical rates are available in annexure B.

   9. The interest charge

   10. The interest charge is the interest earned by trustees and administrators (“'practitioners”) on money held on trust.  This interest income is payable to the government.  It is used to offset the cost of activities that benefit the entire personal insolvency system, as with realisations charge.
   11. The interest charge is the total interest earned by practitioners on trust money held in:
       • bankruptcies
       • bankruptcy compositions
       • controlling trustee authority administrations
       • personal insolvency agreements
       • insolvent deceased estate administrations
       • debt agreements.
   12. Where the practitioner is charged by a bank for the maintenance of an account, the amount paid is an allowable deduction for the purposes of the interest charge calculation.  Where a practitioner operates a single bank account for all their administrations, the interest charge is not required to be calculated for each administration separately.

   13. Payment of the realisations and interest charges

   14. The liability for payment of the realisations and interest charges is that of the practitioner (see subsections 5(3) and 6(2) of the Estate Charges Act).  The amount of charge paid is borne by the administration.
   15. Interest and realisations charges are payable at the end of each financial year.  The due date for payment is 35 days after the end of the financial year.  The due date may alter from year to year but will fall in early August.
   16. Practitioners may choose to make interest charge and realisations charge payments at any time before the due date.  However, the assessment of the total liability is done after the due date each year and coincides with the lodgment of an annual administration return (“AAR”) by the practitioner.
   17. Payments can be made via electronic funds transfer or credit card.  The preferred method of payment is electronic funds transfer.  All payments should be made as per instructions on the payment advice available on the AAR online webpage.  The payment advice is to be used for all payment methods, including all AAR periods and administrations for that practitioner.
   18. Practitioners can check the status of their payments through the AAR online website.  Up to 3 business days should be allowed for payments to appear in the practitioner’s AAR payment history, to cater for processing timeframes.
   19. Any enquiries about the AAR process can be made by visiting the AAR online webpage.

   20. Liabilities of less than $10

   21. Where the interest charge or realisations charge liability calculated for an estate is less than $10, this amount is not payable (see subsections 5(1A) and 6(1A) of the Estate Charges Act).  It is important to note that these provisions are applicable where the total amount of the charge payable in the financial year is less than $10 (i.e. where total realisations are no more than about $143), and not where the amount of any particular underpayment is less than $10.
   22. Where either the interest or realisations charges calculated for an estate is less than $50, the practitioner can elect to defer that payment until the amount due is more than $50 or until the relevant estate is finalised, whichever comes first.  Under section 280 of the Bankruptcy Act, written notification of this election needs to be made to the Inspector-General via email to PractitionerSurveillance@afsa.gov.au.

   23. Late payment penalties

   24. A penalty of 20% per annum is payable on the amount of interest and realisations charges outstanding for the period during which the amount remains unpaid.  The penalty is payable by the practitioner.  Under section 281 of the Act, The practitioner cannot recover the penalty from the estate.
   25. Where a practitioner believes that a payment for realisations or interest charge will be made after the due date, the practitioner can make application to the Inspector-General for an extension of time to make payment.  Requests can be made to the Inspector-General via email to PractitionerSurveillance@afsa.gov.au.

   26. Extensions of time for payment

   27. The Inspector-General has the discretion to extend the time for payment of the charges in certain circumstances.  The practitioner will need to make an application for an extension of time before the due date for payment, and the application must set out the reason(s) why an extension is sought.  Applications to extend the time for payment can be to the Inspector-General via email to PractitionerSurveillance@afsa.gov.au.
   28. The Inspector-General’s decision on the application is reviewable by the Administrative Appeals Tribunal under section 282 of the Bankruptcy Act.

   29. Remission of the realisations charge, interest charge or late payment penalties

   30. The Inspector-General may remit an amount of charge or penalty that is payable but that has not been paid if the Inspector-General thinks that failure to remit  the amount would cause the practitioner undue hardship and that it is appropriate to remit that amount.  The application can only be made by a practitioner and needs to be in writing setting out the basis on which the remission is sought.
   31. The Inspector-General’s decision on the application is reviewable by the Administrative Appeals Tribunal under section 283 of the Bankruptcy Act.
   32. Application for remission of the charges or penalty can be made to the Inspector-General via email to PractitionerSurveillance@afsa.gov.au.

   33. Administrations that are set aside by the Court

   34. Where an administration is set aside by the Court (as opposed to being annulled under subsection 153B of the Bankruptcy Act), the administration never existed and any realisations that a practitioner may have had in that estate will not be subject to the realisations and interest charges.  In these instances, a formal remission application is not required and a copy of the order of the Court sent to AFSA will suffice.  (It is noted that the setting aside of an administration by the court is rare.)

   35. In Wenkart v Pantzer [2003] 132 FCR 273, the Court considered whether payments received by a trustee after a bankruptcy was annulled under section 153B will attract realisations charge.  Lindgren J held that:

       …in order for the realisations charge to be attracted, there must be an amount received by a person who, at the time of receipt, bears the capacity of, relevantly, the trustee of the estate of a bankrupt, and that the amount must be received by that person in that capacity.

   36. Reconciliation of amounts paid

   37. The AAR provides summary details of all financial transactions in estates administered by the relevant practitioner.  A calculation of the realisations charge liability is made based on the information provided in the AAR.  That information is matched with the realisations charge payments that have been made by the practitioner for that financial year.
   38. The accuracy of the information disclosed on the AAR may be verified during our practitioner inspection programme.

2. Reconciliation of realisations and interest charges

   1. Practitioners should reconcile the amount shown as payable on the AAR with any amounts being remitted for realisations and interest charges.  Where there are differences, the practitioner should make the appropriate changes to the AAR data or the payment.
   2. AAR online will tally the realisations and interest charge payments, as reported for a practitioner’s administrations from the AAR submissions, against the total amount received by AFSA.
   3. If, after the due date, an underpayment is identified, we will contact the practitioner to advise payment is required based on the information provided in the AAR.  Where there is no satisfactory explanation for the underpayment, the practitioner will be issued an invoice for the underpaid amount.  A separate invoice will be sent to the practitioner for the penalty payable for the delay in the payment of the correct amount of realisation or interest charge.
   4. Overpayments will be reflected in the practitioner’s AAR online account and steps should be taken by the practitioner to identify the cause of the overpayment and remedy it.
   5. A practitioner can request a refund of an overpayment of realisations charge or interest charge.  See the AAR support form for details or amend the AAR lodgment.

3. Calculating the realisations charge

   1. How is the realisations charge calculated?

   2. The realisations charge for all types of administrations is calculated using the following formula contained in section 8 of the Estate Charges Act:

      Realisations charge payable = (Amount realised – Permitted deductions) * RC rate

   3. Amounts realised include all amounts received by a practitioner of an estate but exclude the following types of receipts:
      • creditor indemnities received in respect of costs of administering an estate or any funding received from the Commonwealth under section 305 of the Bankruptcy Act (see examples 5)
      • any amount received from the Commonwealth under the Fair Entitlements Guarantee for distribution to affected employees of the debtor/bankrupt (see example 4)
      • the goods and service tax collected from the sale of any goods and/or services in the estate (see examples 7, 8 and 9)
      • the component of any realisation that relates to non-divisible property (see example 11).
   4. The total amount on which the charge is payable is restricted to the amount required to pay out all the costs and debts of the administration.  This means that the charge is not payable on any surplus money realised (see example 10).
   5. Permitted deductions are limited to:
      • amounts paid to secured creditors (see example 2)
      • the net loss (if any) incurred in continuing to trade the bankrupt’s or debtor’s business (see example 8).
   6. Note that deductions are not generally applicable in a debt agreement administration.  The exclusions in respect of amounts realised also would not be applicable in a typical debt agreement.  Calculation of the realisations charge liability in a debt agreement is fairly simple and is illustrated in example 1.

Annexure A – Examples of realisations charge liability calculations

The examples below illustrate the principles underlying the calculation of the realisations charge in common transaction types.  Certain transactions/administrations may have unique features and the treatment of the realisations charges illustrated below may or may not apply in those circumstances.

Practitioners are encouraged to contact AFSA if they are uncertain of the treatment of realisations charges for a particular set of transactions in any administration.

Example 1. RC calculation on a typical debt agreement

Under the terms of the debt agreement, an administrator received payments of $500 per month from the debtor for 10 months during the relevant charge period.  The administrator has distributed $4000 to creditors and taken $1000 towards his fees.

The realisations charge payable by the DAA is calculated as follows:

Example 2. RC calculation involving payments to secured creditors and net receipts

The trustee has sold the bankrupt’s house property for $500,000 and paid $400,000 to the mortgagee.  The trustee has received a cheque of $75,000 from his settlement agent for the net proceeds from the sale of the house.  The settlement statement shows an amount of $20,000 was paid to the selling agent, $4000 towards the outstanding council rates and $1000 to the settlement agent’s fees, including disbursements.

Note that a deduction for a payment to a secured creditor is available if the debt exists at the time of payment and the debt is secured by the property of the debtor.  For example, a deduction would not be available if a trustee makes an advance payment for council rates, as a debt to the council did not exist at the time of payment.  A deduction would also not be available if a trustee makes a payment against a debt that the debtor may be liable, but which is secured by property belonging to a third party.

Example 3. RC calculation in a typical controlling trustee administration

Debtor X has given a controlling trustee an amount of $100,000, being the amount he proposes to offer under a PIA.  It is to be held in trust pending the outcome of the creditor’s meeting.  Debtor X has authorised the controlling trustee to deduct $5000 towards agreed costs and remuneration should the proposal be accepted or rejected by creditors.  Creditors reject Debtor X’s proposal and the controlling trustee returns $95,000 to Debtor X.

The realisations charge liability is calculated as follows:

Notes:

1. In the above example, if the CT costs and fees was paid by the debtor separately or by a third party, the RC would have been calculated on the amount the CT received irrespective of the source of the money.
2. If creditors had accepted the proposal and appointed the same CT or another person as the PIA trustee, then ordinarily the RC would be paid by the PIA trustee on $100,000.  The CT will not have to pay RC on any amount that he receives from the PIA administration for controlling trustee costs and remuneration, i.e. the RC is not levied on the same money twice.

Example 4. RC calculation in administrations involving FEG payments

A bankrupt was operating a restaurant with 5 employees.  After assessing the profitability of the business, the trustee decided to immediately shut it down and advised the employees about the Fair Entitlements Guarantee.  As a result of employees lodging claims under FEG, the bankruptcy trustee received $30,000.  The trustee also received $1500 from the Attorney-General’s Department as reimbursement for their costs of verifying employee entitlements under the scheme.  No other realisations were made in the estate.

The $30,000 received by the trustee for distribution to affected employees is excluded when calculating the RC liability.  The $1500 the trustee received from the Attorney-General’s Department is also not a realisation in the estate because this money was received by the trustee in their capacity as an agent of the Attorney-General’s Department for work done on the Department’s behalf, not in the capacity as trustee of the bankrupt estate.

Example 5. RC calculation in estates involving creditor funding or section 305 funding

The Australian Taxation Office (“ATO”), a major creditor, has agreed to provide a bankruptcy trustee with an indemnity of up to $25,000 for investigations.  As at the end of the charge period, the trustee had called up $15,000 against the ATO indemnity to pay for legal costs of $10,000 and their own costs of $5000.  The trustee also successfully realised a $100,000 preferential payment in the estate.  As a result of the trustee’s investigations, they returned the $15,000 to the ATO.

The RC payable is calculated as follows:

Note that the indemnity funding received from and refunded to the ATO should also be disclosed in the AAR.  This ensure that the administration account correctly reflects what occurred.

Example 6. RC calculation in estates involving commercial litigation funding

A litigation funding firm agreed to provide funding to a trustee to pursue recovery of an undervalued transfer of property for a 30% funding fee, plus reimbursement of costs upon success.  The trustee ultimately settled with the transferee for $100,000.  The trustee’s solicitor sent the trustee a cheque for $55,000 after directly paying the litigation funder an amount of $45,000 (being $30,000 funding fee and $15,000 reimbursement of legal costs that the litigation funding firm previously paid directly to the solicitor).

The net amount received should be grossed up for the litigation funding firm’s fees and costs and the RC must be paid on the gross value of the realisation.

The RC payable is calculated as follows:

Example 7. RC calculation in an administration involving sale of business assets

In accordance with the terms of a PIA, the trustee has closed the debtor’s landscaping business (GST registered) and sold the unencumbered plant and equipment (“P&E”) of the business at auction for $110,000.  There were no other issues to be dealt with under the PIA and creditors had agreed to fix the trustee’s remuneration at $22,000.  After deducting a commission of $11,000, the auctioneer sends the trustee a cheque for $99,000.  The trustee lodges an activity statement with the ATO and remits the estate’s GST liability of $7000 (being GST collected $10,000 less ITC for agent’s commission $1000 less ITC for trustee fees $2000).

The RC liability in this estate is calculated as follows:

Notes:

1. The GST collected and remitted to the ATO should be disclosed in the AAR to ensure correct representation of the administration’s account is reported to AFSA.
2. Often trustees may receive a GST refund cheque from the ATO where the refund relates to the period of business operations prior to the appointment of the trustee.  In these instances, the GST refund is simply an asset of the estate and the RC is payable on the refund amount.  The treatment of GST or income tax refunds in these situations is just like the recovery of a book debt.

Example 8. RC calculation in estates involving “trade on” situations

A debtor has entered in to a personal insolvency agreement (“PIA”).  Under the terms of the PIA, the trustee continued to operate the debtor’s newsagency for 2 months until a buyer was found.  At the end of the 2 months, the trustee sold the business as a going concern for $550,000.  For the trade on period, the sales revenue was $110,000 (GST inclusive) and expenses were $132,000 (GST inclusive).  These transactions all occurred in the same charge period.  Upon lodging an activity statement for the 2-month period in which they were operating the business, the trustee received a GST refund of $2000 from the ATO.

The realisations charge payable is calculated as follows:

Example 9. RC calculation in estates involving business and non-business asset sales

A trustee sold a bankrupt’s business assets for $11,000 (GST inclusive).  The trustee has also realised a $300,000 deceased estate interest.  Creditors approved a total of $25,000 (GST inclusive) remuneration.

The trustee has incurred selling agent’s costs of $5500 (GST inclusive) to sell the business assets and legal costs of $15,000 (GST inclusive) in realising the interest in the deceased estate.

The trustee’s time records show that the remuneration relating to the realisation of the business assets was $16,500 and that the balance is in relation to the realisation of the interest in the deceased estate.

The trustee has lodged an activity statement and received a GST refund of $1000.  The activity statement calculations were:

The realisations charge payable is calculated as follows:

Note that the GST refund is not subject to the realisations charge as the refund is arising out of money on which the RC has effectively been paid.  The principle to be applied is that money that has already been subject to the RC should not be subject to the RC again.

Example 10. RC calculation in an estate with a surplus after annulment

In the case of an estate with a surplus following a section 153A annulment, the realisations charge liability is calculated based on the amount of debts and costs for annulment, using the grossing up formula of

This formula will ensure that the correct RC is also calculated on the gross realisation charge.

A trustee realised a house property in a bankrupt estate for $450,000 and paid the secured creditor $350,000.  A 100 cents in the dollar dividend was paid to all proved unsecured creditors totalling $50,000 after paying the costs ($10,000) and fees ($20,000) of the administration.  The applicable realisations charge rate during this charge period is 7%.

In this example, the RC payable is $6021.51.  This has been calculated as follows:

Example 11. RC calculation in an estate involving realisation of non-divisible property

A trustee sold a bankrupt’s unencumbered motor vehicle for $20,000.  After payment of the selling agent’s costs and commission, the trustee received a net amount of $18,000 in the estate.  The exempt property amount that a bankrupt can retain was $8150 at the time the vehicle was realised (this is the amount that the trustee must refund to the bankrupt in accordance with subsection 116(2C) of the Bankruptcy Act).

The RC payable is calculated as follows:

Example 12. RC calculation when there is no surplus from the sale

A trustee instructed an auctioneer to collect the bankrupt’s farm equipment and sell it at auction.  The equipment was sold for $12,000, and the auctioneer’s commission and transport costs were $12,000.

The RC payable is calculated as follows:

Example 13. RC calculation on money received from other bankrupt estate

A trustee receives a dividend paid from another bankrupt estate in the amount of $2000.  Realisations charge is not payable on this receipt as it has already been paid on the money received by the trustee of the other bankrupt estate.

Annexure B – Historical realisations charge rates