Bankruptcy Australia and Your Income

The most important thing I can tell you is that the bankruptcy legislation protects your income during bankruptcy to ensure you have money to live. The financial pressure you are experiencing now will go as you will no longer be using your wages to make payments to creditors.

If you are a high-income earner, during bankruptcy you may have to pay a small percentage of your income to the bankrupt estate. There is a threshold amount that your after-tax income must exceed before you are required to pay a small portion of your total income to your bankrupt estate. Some people refer to this threshold amount as the means test or bankruptcy means test. Don’t be confused, they are talking about the threshold amount. This threshold amount varies, depending on the number of dependants you have. The threshold amounts in after-tax dollars are:

Number of Dependants

Annual After-Tax Income

Weekly After-Tax Income











5 or more


Claiming a Dependant for Income Contribution Calculations

Below I summarise information that I think will help you when you look at whether you can claim dependants to go to a higher threshold amount:

  1. A dependant is a person you financially support who predominantly lives with you, and income is below $3,975.00.
  2. If you and your life partner become bankrupt, you both can claim your dependants.
  3. If you are separated and you pay child support through the CSA, these payments are deducted from your income, prior to calculating whether your income is over the threshold amount.
  4. If you are separated and receive child support through the CSA, these monies are not added to your income when calculating whether your income is over the threshold amount.


How Bankruptcy Income Contributions are Calculated

If your income is over the threshold amount, I summarise below how the amount you will be required to pay is calculated:

  1.  The amount you are required to pay is calculated annually, on each anniversary of your bankruptcy. Some people get confused with this thinking that it will be calculated for each financial year. No, it is calculated for each year you are bankrupt,  from the date when you gained the protection of bankruptcy.
  2.  Income contributions are only calculated on your income whilst you are bankrupt.
  3.  Statutory Superannuation paid by your employer whilst you are bankrupt is protected and is not included in income contribution calculations.
  4.  Your after-tax income (not your before-tax income) is used to determine whether your income exceeds the threshold amount.
  5.  If your after-tax income exceeds your threshold amount, the excess amount over your threshold is divided by 2 to determine your income contribution liability.
  6.  Salary packaging during bankruptcy can work against you if it decreases the amount of tax you are required to pay. Decreasing your tax liability will cause your after-tax income to increase – which will cause your income contribution amount to also increase.
  7. The independent income of your spouse is not included with your income to work out your income contribution amount.

What is Income for Bankruptcy Income Contribution Calculations?

To help you work out whether your after-tax income exceeds the threshold amount, I summarise below what is included as your income. Your income for the bankruptcy calculation is not necessarily the same as your ATO after-tax income:

  •  The bankruptcy act defines income differently from the income assessment act.
  • The bankruptcy act has a wide definition of income. For most of us, the process is quite simple, we get our wages and our payslips. For others, it can get more complicated. Income includes any of the following: wages, retirement income, tax refunds, taxable fringe benefits, salary sacrifice amounts, business profits, loans received from associated entities, income earnt from your endeavours but paid to someone else, super contributions by the employer that are above the stat super prescribed amount.
  • If you work overseas while bankrupt your Income will include the income you earn in Australia and overseas.

What expenses can be deducted for Bankruptcy Income Contribution Calculations

If you are a salary and wage earner, really very little can be deducted from your income. If you operate a business while bankrupt, you can deduct expenses that were incurred for you to earn your income: I summarise below information to help you work out what expenses you may be able to claim:

  • Expenses can only be deducted if they must be incurred to earn the income. Typically, this is for self-employed persons.  How much can I earn – and how much can I keep?
  • Examples of expenses that are not classified as being incurred to earn an income are: depreciation and super contributions to gain a tax deduction.
  • Examples of expenses that are classified as being incurred to earn an income are: required materials and utilities for you to be able to do your work.

How Income Contributions work and what happens if your circumstances change

I must say that what I do like about how income contributions work is that if your circumstances change, you are not locked into a fixed amount that you must pay without regard. I summarise below how it works:

  • If your income is above the threshold amount then you will be required to pay income contributions. Your Trustee will work out the amount you are required to pay and let you know, with details of the calculations. You then just make the monthly payments over the year into the trust bank account that your trustee will set up for you.
  • If your income decreases your trustee will redo the calculations and let you know the reduced amount you will have to pay or if your income drops below the threshold amount your trustee will tell you to stop making income contribution payments.
  • If your income increases during the year your Trustee will redo the calculations and let you know the increased amount you will be required to pay for the rest of the year.
  • While you are bankrupt, at each anniversary your trustee will work out and let you know what amount, if any, you are required to pay by monthly instalments over the next year.

To give insight into how income contributions are calculated, I set out below an example:

  • If you earn $100,000 after tax and have two dependants, you will exceed your threshold by $15,368.09 ($100,000 – 84,631.91).
  • You will be required to pay half of this amount to your bankrupt estate, $7,684.05 ($15,368.09 / 2) over the following year.
  • Your fortnightly payments would be $295.50 ($7,684.05 / 26).
  • Your available income would be $92,315.95 ($100,000 – $7,684.05) to spend as you wish.
  • Your income contribution amount would be 7.68% of your after-tax income.

Bankruptcy Australia and Income FAQs

Below are answers to questions I commonly get asked about income while talking to people who are enquiring about bankruptcy:

  • During bankruptcy, you spend your income on your living and entertainment needs as you wish. The bankruptcy trustee is not involved.
  • There is no limit on how much you can save in your ordinary bank account.
  • Your savings from your wages are your property when you are discharged from bankruptcy.
  • You can gift money from your wages to family and charities if that is what you wish to do.
  • You can gift money to family overseas.
  • During bankruptcy, you can buy household items and can buy a replacement car provided its value is below its auction threshold amount.
  • You can save for a holiday during bankruptcy.
  • You can holiday in Australia and Overseas during bankruptcy. For overseas travel, you will have the inconvenience of obtaining the Trustee’s travel consent but if you are doing the right thing, this is not a problem.
  • You can pay school fees and give financial assistance to your kids to assist them with their university studies.

For further information on Bankruptcy and Income Contributions, a good article to read is: ‘Wages Super and Spending‘.

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