Bankruptcy Legislation Amendment (Fees and Charges) Bill 2006

Date introduced:  16 February 2006

House:  House of Representatives

Portfolio:  Attorney-General

Commencement:  Schedule 1 Part 1, Schedule 2 and Schedule 3 commence on 1 July 2006. Commencement of Schedule 1 Part 2 is dependent on the Bankruptcy Legislation Amendments (Anti-avoidance) Act 2006 commencing operation. Schedule 4 commences on Royal Assent.

 

Purpose

This Bill amends the Bankruptcy Act 1966 and related legislation to increase the cost recovery measures of the Insolvency and Trustee Service Australia (ITSA).

Background

The Insolvency and Trustee Service Australia is the government agency responsible for the administration and regulation of the personal insolvency system in Australia. During 2004-05 ITSA completed a review of its cost recovery arrangements.

Cost recovery has been described by the Productivity Commission in the following terms:

Cost recovery differs from general taxation which raises revenue to fund a wide range of Government activities or products. Cost recovery, on the other hand, recovers some or all of the costs of a particular Government activity or product……

The most direct forms of cost recovery are where particular users are charged a fee based on the cost of providing the Government product consumed. Less direct forms include special levies or earmarked taxes to fund a specific Government activity. The link between the revenue raised and the funding of a specific activity distinguishes taxes imposed for cost recovery from general taxation. The fact that cost recovery is usually not undertaken with a view to generating a profit distinguishes it from the pricing objectives of government business enterprises. ⁽¹⁾

Cost Recovery Guidelines - background

ITSA conducted a review of its cost recovery arrangements in accordance with the Commonwealth Cost Recovery Guidelines for Information and Regulatory Agencies, issued by the Department of Finance and Administration.

The Productivity Commission (PC) inquired into cost recovery arrangements within Government Agencies. Its report, Cost Recovery by Government Agencies, was released in March 2002.

In its report the PC noted that ‘notwithstanding its increased significance, cost recovery currently lacks the attributes of good policy – namely, a clear rationale, accountability, transparency, performance assessment and review’.⁽²⁾

In response to the PC’s report the Government, in December 2002, announced that it would introduce a formal cost recovery policy for Government agencies.⁽³⁾ This cost recovery policy is located on the Department of Finance website at http://www.finance.gov.au/finframework/docs/Guidelines_-_Regulatory_2_Dec.rtf. The cost recovery policy states that Commonwealth regulatory agencies should apply these Guidelines when a review of cost recovery arrangements is required.

ITSA’s Cost Recovery review

In accordance with the cost recovery guidelines, ITSA reviewed all its fees and charges in 2004 and identified which services should be cost recovered, the type of charge to apply, who should pay and which services would be more appropriately funded through general taxation.

ITSA’s portfolio budget statements for 2004-05 state that:

Applying cost recovery policy would result in variations to existing fees and charges in Bankruptcy Act services to ensure they reflect the full cost of the service, and introduction of a new charge – ie extension of the ‘realisations charge’ – to apply to moneys recovered in debt agreements.

The review concluded that fees and charges should be applied to all Bankruptcy Act services provided by ITSA, other than the processing of debtor’s petitions and debt agreement proposals, policy and legislation reform and other support services to the Minister and Parliament, which should be Budget funded.

In connection with ITSA’s proceeds of crime activities, costs of controlling and selling property are recovered from the administration when sufficient assets are forfeited. When assets under control are not forfeited, or if their value is insufficient to cover costs, Budget funding of the Official trustee’s costs is appropriate.

These measures would increase the proportion of ITSA’s costs which are recovered in fees and charges from 58% to 72%. Implementation of cost recovery is estimated to reduce annual net budget funding to ITSA by approximately $6m per year. ⁽⁴⁾

The portfolio budget statements go on to state that:

Implementation of the revised fees and charges will generate an additional revenue of $6.9m per year once fully implemented. This would be offset by $0.9m per year to meet the cost of changes to existing systems and processes which would be required to deal with new billing and time recording arrangements.⁽⁵⁾

The following table, drawn from the budget statement, sets out the proposed schedule of fees and charges for ITSA at the time of the review as well as the levels of fees and charges that were in place at the time of the review.

Source: ITSA Cost Recovery Impact Statement

As noted above, the proposed changes to fee and charge arrangements will raise an additional $6.9 million for ITSA. As the table indicates, many of ITSA’s functions are currently paid for through fees and charges. The review did not suggest that any new fees and charges should be imposed on ITSA’s functions. The review has however recommended that there be an increase in current fees and charges.

Since the time of publishing this information in the budget documents, ITSA has refined the proposed new fee and charge arrangements. The revised fees and charges (current at December 2005) are set out in the appendix.

General levy on realisations from debt agreements

The cost recovery review had recommended that a general levy should be imposed on debt agreements. Debt agreements first became available to people in financial difficulties in 1996. As the table below indicates, the use of debt agreements has steadily grown and in the 2004-05 financial year made up 18.6% of all personal insolvency administrations. This rise in the use of debt agreements has taken place at the same time as the share of personal insolvency agreements has fallen to 0.8% and bankruptcies to 80.6%.

Source: ITSA Annual Report 2004-05⁽⁶⁾

Currently the realisations from bankruptcies and personal insolvency agreements are subject to an 8% levy. The revised fee and charge arrangements proposed to reduce that levy to 6.5% but to also impose a 6.5% levy on realisations from debt agreements.

Some groups were opposed to imposing such a levy on debt agreements. The Law Council of Australia, for example, argued that:

The sub-committee opposes the implementation of any realisation charges upon Debt Agreements as they would tend to undermine the very purpose for which they were first introduced. Such Agreements are of a low order of magnitude of debts and are intended as an efficient system for keeping bankruptcy numbers down and avoiding the cost which would arise from the administration of these estates as bankruptcies’.⁽⁷⁾

Creditors and debt agreement administrators also argued that the imposition of this levy would place a significant additional cost on debt agreements and would deter people from using them.⁽⁸⁾

At the time of the review, however, ITSA argued that debt agreements do require regulatory and compliance work by ITSA and hence should be subject to a levy.⁽⁹⁾

More recently, the Government has decided to continue with the levy on personal administrations and bankruptcies but to not impose it on debt agreements. In the Second Reading Speech to the Bill, the Attorney-General stated that:

The government has decided not to apply the realisations charge to money received in debt agreements. This will ensure that debt agreements continue to be available as a viable alternative to bankruptcy for many debtors.⁽¹⁰⁾

The rate of the levy has yet to be determined however the Bill states that the rate must not be more than 15% of realisations.

The money from this levy will be used to fund ITSA functions such as monitoring and investigating complaints against insolvency practitioners,⁽¹¹⁾ providing an information service⁽¹²⁾, Inspector General reviews,⁽¹³⁾ and investigation of bankruptcy offences.⁽¹⁴⁾

Setting of fees and charges

Currently fees and charges are set either through legislation or regulations. The Bill changes this arrangement so that all fees and charges will now be set by way of legislative instrument made by the Minister.

The explanatory memorandum to the Bill explains that this ‘will provide the responsiveness and flexibility required to enable effective and fair cost recovery for services supplied to stakeholders’.⁽¹⁵⁾

The legislative instruments have not been exempted from the Legislative Instruments Act 2003 and hence will be ‘disallowable instruments’ for the purposes of that Act.

Main provisions

Schedule 1, parts 1 and 2 amend the Bankruptcy Act 1966 so that fees for different services under the Act can be set by a legislative instrument by the Minister. Currently these fees are set through regulations.

Schedule 2 amends the Bankruptcy (Estate Charges) Act 1997 so that the Minister will set the percentage amount of the levy on personal administrations and bankruptcies by legislative instrument under that Act. Currently the amount of the levy is set by way of regulation. Schedule 2 also removes the minimum levy amount of 8% but retains the maximum amount of 15%.

Schedule 3 repeals the Bankruptcy (Registration Charges) Act 1997. Fees that were set under this act will now be set under the Bankruptcy Act 1966.

Schedule 4 makes some minor technical amendments to the Bankruptcy Act 1966. In particular, the amendments will help ITSA deliver their services electronically.

Concluding comments

This Bill implements cost recovery measures for the Insolvency and Trustee Service Australia. The Bill follows on from a review of the current cost recovery arrangements of ITSA. It is proposed that the new cost recovery arrangements will increase the proportion of ITSA’s costs which are recovered in fees and charges from 58% to 72%.

The Bill does not set out what the new fees and charges for ITSA will be. Rather it creates a series of legislative instrument making powers for the Minister to set the fees and charges. Any legislative instruments made by the Minister under these powers will be disallowable by Federal Parliament. The fees and charges will be reviewed every two years in consultation with stakeholders.

Endnotes

1. Productivity Commission, Cost Recovery by Government Agencies Inquiry Report, Report No. 15, 16 August 2001, Ausinfo, Canberra, 2001, p. xxxii.

2. ibid.

3. Commonwealth Cost Recovery Policy Media Release, Senator Nick Minchin, Minister for Finance and Administration, 4 December 2002.

4. Insolvency and Trustee Service Australia, Budget Papers 2005-06, p. 384.

5. ibid.

6. Insolvency and Trustee Service Australia, Annual Report 2004-2005, Canberra, 2005, p. 17.

7. Law Council of Australia, ‘Submission to the Insolvency and Trustee Service Australia Cost Recovery Review’, 24 January 2005.

8. Discussions with ITSA, March 2006.

9. Insolvency and Trustee Service Australia, Cost Recovery Impact Statement, February 2005, p. 19.

10. Bankruptcy Legislation Amendment (Fees and Charges ) Bill 2005 Second Reading Speech.

11. ibid., p. 5–6.

12. Ibid., p. 5.

13. ibid., p. 6.

14. ibid., p. 9.

15. Bankruptcy Legislation Amendment (Fees and Charges) Bill 2005 Explanatory Memorandum, p. 3.