Inspector-General Practice Direction 2

IGPD 2 - Collection of realisations and interest charges
Date of release: 
November 2012
Last updated: 
May 2015

1. Collecting the realisations and interest charges

What is the realisations charge?

1.1 The realisations charge is a levy that is imposed by the government to fund the cost of certain activities undertaken by AFSA that benefit the personal insolvency system. These activities include the regulation of the personal insolvency system, investigation and prosecution of breaches of personal insolvency law and enquiries in relation to estates being administered by the Official Trustee where there appear to be potential assets or offences involved.

What is the interest charge?

1.2 The interest charge is the interest earned by trustees and administrators ('practitioners') on the funds that they hold on trust. This interest income is payable to the government. It is used by the government to offset the cost of those activities that benefit the entire personal insolvency system. These activities include the regulation of the personal insolvency system, investigation and prosecution of breaches of personal insolvency law and enquiries into estates being administered by the Official Trustee where there appear to be potential assets or offences involved.

How is the realisations charge calculated?

1.3 The realisations charge is payable on receipts in bankruptcies, post-bankruptcy compositions (s73), controlling trustee authority administrations (s188), insolvent deceased estate administrations, personal insolvency agreements, and debt agreements.

1.4 There are specific rules which govern how the charge is calculated and these are contained in the Bankruptcy (Estate Charges) Act 1997. There are certain deductions that are allowed (e.g. payments to secured creditors) while certain types of receipts within these administrations (e.g. creditor indemnities) may not attract the levy at all. The total amount upon which the levy is calculated is also limited to the amount that is required to pay out all the costs and debts of the administration. Part 3 of this Practice Direction provides examples that illustrate how the realisations charge is calculated.

1.5 The realisations charge rate is periodically reviewed. The current rate can be found on AFSA’s website under Fees and charges. The rate is set by the Bankruptcy (Estate Charges) (Amount of Charge Payable) Determination 2015. Trustees and administrators are advised of any rate change prior to the date the change takes effect.

Note: A debt agreement that is self-administered, i.e. administered by the debtor, does not attract the realisations charge.

How is the interest charge calculated?

1.6 The interest charge is the total interest earned by trustees and administrators on trust funds held in bankruptcies, in bankruptcy compositions (s73), controlling trustee authority administrations (s188), insolvent deceased estate administrations, personal insolvency agreements, and debt agreements.

1.7 Where the trustee or administrator is charged an amount by a bank in respect of the maintenance of the 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/estates, the interest charge is not required to be calculated for each administration/estate separately.

Who pays the interest and realisations charges?

1.8 The liability to pay the realisations and interest charges is that of the practitioner (subsections 5(3) and 6(2) of the Bankruptcy (Estate Charges) Act 1997). The amount of charge paid is borne by the estate or administration.

When are the interest and realisations charges payable?

1.9 The 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, i.e. 4 August each year.

1.10 Trustees or administrators can choose to make payments before the due date. Payments during the year (prior to the due date) are usually made if the estate or administration is being finalised.

1.11 Where the interest and realisations charges calculated for an estate is less than $10, this amount is not payable (subsections 5(1A) and 6(1A) of the Bankruptcy (Estate Charges) Act 1997).

1.12 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. Written notification of this election needs to be made to the Inspector-General (section 280 of the Bankruptcy Act 1966).

1.13 Notification under section 280 can be lodged with the Inspector-General at regulations.enquiry [at] afsa.gov.au.

Are there any penalties for late payment?

1.14 A penalty of 20% p.a. 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. The practitioner cannot recover the penalty from the estate (section 281 of the Bankruptcy Act 1966).

1.15 Where a practitioner believes that a payment for realisations or interest charge will be paid after the due date the practitioner can make application to the Inspector General for an extension of time to make payment.

1.16 Application to the Inspection General for an extension of time to can be lodged at regulations.enquiry [at] afsa.gov.au.

Can trustees and administrators pay before the due date?

1.17 Practitioners may choose to make realisations charge and interest charge payments at any time before the due date. However the assessment of the total liability is done after 4 August each year and coincides with the lodgement of an annual estate return by the practitioner.

How are the charges paid?

1.18 Practitioners are required to lodge an AER after the end of each year and the information included in the return is used to calculate the amount of charge payable by the practitioner.

1.19 Payments can be made via electronic funds transfer, cheque or credit card, with the preferred method of payment being electronic funds transfer.

All payments should be made as per instructions on the payment advice available on the AER online webpage. The payment advice is to be used for all payment methods, including all AER periods and administrations for that practitioner.

Practitioners can check the status of their payments through the AER website. Up to 3 business days should be allowed for payments to appear in the practitioner’s AER payment history, to cater for processing timeframes.

1.20 Any enquiries regarding the AER process can be made by visiting the AER online webpage.

Can the time for the payment of the interest and realisations charges be extended?

1.21 The Inspector-General may extend the time for payment of the charges in certain circumstances. The trustee or administrator is required to make the application before the due date for payment setting out the reasons based on which an extension is sought. The Inspector-General’s decision on the application is a decision that is reviewable by the Administrative Appeals Tribunal (section 282 of the Bankruptcy Act 1966).

1.22 Application for remission of the charges or penalty can be made by making a written request setting out the relevant details and lodged at regulations.enquiry [at] afsa.gov.au

Is there any provision for remission of the interest charge and realisations charges or late penalty payment?

1.23 The Inspector-General may remit the charge or penalty due if the payment may cause the trustee or administrator undue hardship and it is appropriate to remit that amount. An application can only be made by a trustee or administrator and needs to be in writing setting out the reasons based on which the remission is sought. The Inspector-General’s decision on the application is a decision which is reviewable by the Administrative Appeals Tribunal (section 283 of the Bankruptcy Act 1966).

1.24 Application for remission of the charges or penalty can be made by making a written request setting out the relevant details and lodged at regulations.enquiry [at] afsa.gov.au.

Note: Where an administration is 'set aside' by the court (as opposed to annulled under Sec 153B) then the administration never existed and hence any realisations that a trustee or administrator may have had in that estate will not be subject to the realisations or interest charges. In these instances a formal remission application is not required and a letter with a copy of the order will suffice. The setting aside of an administration by the court is rare.

The decision in Wenkart v Pantzer (2003) 132 FCR 273 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.” 

How does AFSA check that the correct amounts of interest and realisations charges are being paid?

1.25 The AER provides summary details of all the financial transactions in each of the estates administered by a practitioner. A calculation of the trustee’s realisations charge liability is made based on the information provided in the AER. That information is then matched with the realisations charge payments that have been made by the trustee in respect of that financial year.

1.26 AFSA Regulation and Enforcement checks the accuracy of the information disclosed on the AER during the trustee and administrator inspection programme.

2. Reconciliation of realisations and interest charge

2.1 Practitioners should reconcile the amount which is shown as being payable on the AER with the amounts being remitted for realisations and interest charge. Where there are differences, the practitioner should make the appropriate changes to the AER data or the payment.

2.2 AER online will tally the realisations and interest charge payments as reported for a practitioner’s administrations from the AER submissions, against the total amount received by AFSA. If, at 5 August, an underpayment is identified, AFSA will contact the practitioner to advise payment is required based on the information provided.

2.3 Overpayments will be reflected in the practitioner’s AER online account and steps should be taken by the practitioner to identify the cause of the overpayment and remedy it. A practitioner can request a refund, see the AER support form for details, or amend the AER lodgement, as required.

Contacting practitioners regarding over or underpayments

2.4 Practitioners will be advised of any overpayments or underpayments as soon as possible after 4 August.

2.5 Where there is no satisfactory explanation for the underpayment, the practitioner will be issued an invoice for the underpaid amount.

2.6 An invoice will be issued separately to the practitioner for the amount of penalty payable for the delay in the payment of the correct amount of RC or IC.

2.7 A practitioner can make a claim for the refund of an overpayment of RC or IC by completing the online AER support form.

3. Calculating the realisations charge

How is the realisations charge calculated?

3.1 The realisations charge for all types of administrations under the Bankruptcy Act 1966 can be calculated using the following formula as set out in section 8 of the Bankruptcy (Estate Charges) Act 1997:

Realisations charge payable = (Amount realised - Permitted deductions) x RC rate

Note regarding Debt Agreement administrations: Generally deductions are not 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 straightforward and is illustrated in example 1.

3.2 The total amount on which the charge is payable is restricted to the amount which is required to pay out all the debts, costs and expenses of the estate, ie the charge is not payable on the estate surplus (see example 10).

Amounts realised include all amounts received by a trustee or administrator 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 & 6)
  • any amount received from the Commonwealth (Department of Employment) under the Fair Entitlements Guarantee (FEG) for distribution to affected employees of the debtor/bankrupt (see example 4)
  • the Goods & Service Tax (GST) collected from the sale of any goods and/or services in the estate (see examples 7, 8 & 9)
  • the component of any realisation that relates to non-divisible property (see example 11).

The only permitted deductions are:

  • an amount paid to a secured creditor (see example 2)
  • the net loss (if any) incurred in continuing to trade the bankrupt’s or debtor’s business (see example 8).

Examples of realisations charge liability calculations

3.3 The examples below have been used to illustrate the principles underlying the calculation of the realisations charge in commonly encountered transaction types. However, certain transactions/administrations may have unique features and the treatment of the realisations charges illustrated in the examples below, may or may not apply in those circumstances.

3.4 Trustees and administrators are encouraged to contact Regulation and Enforcement if they are uncertain of the treatment of the realisations charges for a particular set of transactions in any administration.

Example 1 RC calculation on a typical debt agreement

3.5 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 $4,000 to creditors and taken $1,000 towards his fees.

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

Amount Realised = $500 x 10 = $5,000
Permitted Deductions = $0
Amount on which RC is payable = $5,000 – $0 = $5,000
RC Payable = $5,000 x applicable RC rate

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

3.7 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 being the net proceeds from the sale of the house. The settlement statement shows that an amount of $20,000 was paid to the selling agent, $4,000 was paid towards the outstanding council rates and $1,000 was charged by the settlement agent for his fees (including disbursements).

Amount Realised = $500,000
Permitted Deductions = $400,000 (mortgage) + $4,000 (outstanding council rates) = $404,000
Amount on which RC is payable = $500,000 - $404,000 = $96,000
RC payable = $96,000 x applicable RC rate

Note: A deduction for 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 instance 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 for which 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

3.8 Debtor X has given a controlling trustee an amount of $100,000 (the amount he proposes to offer under a PIA) to be held in trust pending the outcome of the creditor’s meeting. He has authorised the controlling trustee to deduct $5,000 towards agreed costs and fees should the proposal be accepted/rejected by creditors. Creditors reject X’s proposal and the controlling trustee returns $95,000 to X.

3.9 The RC payable in this situation is calculated as follows:

Amount realised = $5,000 (being the amount CT received for his costs and fees)
Permitted deductions = $0
Amount on which RC payable = $5,000 – $0 = $5,000
RC Payable = $5,000 x applicable RC rate

Note 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 funds.

Note 2: In the above example 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

3.10 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 FEG scheme. As a result of employees lodging claims under FEG, the bankruptcy trustee received an amount of $30,000. The trustee has also received $1,500 from the Department of Employment as reimbursement for his costs of verifying employee entitlements under the scheme. No other realisations were made in the estate.

3.11 In the above example, the amount of $30,000 received by the trustee for distribution to affected employees is excluded when calculating the RC liability. The $1,500 the trustee received from the Department of Employment) is also not a realisation in the estate as this money was received by the trustee in his capacity as an agent of the Department of Employment for work done on their behalf, not in his capacity as trustee of the bankrupt estate.

Example 5 RC calculation in estates involving creditor funding or s305 funding

3.12 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 into the debtor’s affairs. 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 his own costs of $5,000. The trustee has also been successful in realising a $100,000 preferential payment in the estate as a result of those investigations and has returned the $15,000 paid by ATO.

3.13 The RC payable is calculated as follows:

Amount realised = $100,000 (being recovery of preference payment)
Permitted deductions = $0
Amount on which charge is payable = $100,000 – $0 = $100,000
RC payable = $100,000 x applicable RC rate

Note: In the above example, the indemnity funding received and refunded to the ATO should also be disclosed in the AER to ensure correct representation of the administration’s account is reported to AFSA.

Example 6 RC calculation in estates involving commercial litigation funding

3.14 Litigation Funders Ltd (LFL) has agreed to provide funding to recover an undervalued transfer of property for a 30% funding fee plus reimbursement of costs upon success. The trustee ultimately settles with the transferee for $100,000. The trustee’s solicitor sends him a cheque of $55,000 after directly paying LFL an amount of $45,000 (being $30,000 funding fee and $15,000 reimbursement of the legal costs previously paid by LFL direct to the solicitor).

3.15 The net amount received would have to be grossed up for LFL’s fees and costs and the RC must be paid on the gross value of the realisation.

3.16 The RC payable is calculated as follows:

Amount realised = $100,000 ($55,000 + $30,000 + $15,000)
Permitted deductions = $0
Amount on which charge is payable = $100,000 – $0 = $100,000
RC payable = $100,000 x applicable RC rate

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

3.17 Under the terms of the PIA the trustee has closed the debtor’s landscaping business (GST registered) and sold the unencumbered plant & equipment 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 commission of $11,000 the auctioneer sends the trustee a cheque for $99,000. The trustee lodges a Business 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 $1,000 less ITC for trustee fees $2,000).

3.18 The RC liability in this estate is calculated as follows:

Amount realised = $100,000 (being the GST exclusive sale value of the plant & equipment)
Permitted Deductions = $0
Amount on which the RC is payable = $100,000
RC payable = $100,000 x applicable RC rate

Note: In the above example, the GST collected and remitted to the ATO should be disclosed in the AER to ensure correct representation of the administration’s account is reported to AFSA.

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

3.19 Debtor X has entered in to a Personal Insolvency Agreement (PIA). Under the terms of the PIA the trustee continued to operate the debtor’s news agency for 2 months until a buyer could be 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 (incl. of GST) and expenses were $132,000 (incl. of GST). These transactions occurred in the same charge period. Upon lodging a Business Activity Statement (BAS) for the two month period in which he was operating the business, the trustee received a GST refund of $2,000 from the ATO.

3.20 The realisations charge payable is calculated as follows:

Amount realised $652,000 being:
$550,000 (GST exempt sale price of the going concern)
$100,000 (operating revenue net of GST)
$2,000 (GST refund received from ATO)

Permitted deductions $120,000 (being costs of operating the business net of GST)
Amount on which RC is payable = $652,000 - $120,000 = $532,000
RC Payable = $532,000 x applicable RC rate

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

3.21 During a charge period, a trustee has sold a bankrupt’s business assets for $11,000 (incl. of GST). He has also realised the bankrupt’s interest in a deceased estate and received an amount of $300,000 in the estate. Creditors have approved a total amount of $25,000 (incl. of GST) as the trustee’s fees for administering the estate. The trustee has incurred selling agent’s costs of $5,500 (incl. of GST) for the sale of the business assets and legal costs of $15,000 (incl. of GST) in realising the interest in the deceased estate. The trustee’s time records show that the remuneration relating to the recovery of business assets are $16,500 and the balance was in relation to the recovery of the interest in the deceased estate.

3.22 The trustee has lodged a BAS and received a GST refund of $1000. BAS calculations were:

GST collected from sale of business assets: $1,000
Less: ITC on selling costs: -$500
Less: ITC on trustee fees for business asset -$1,500
GST refund due: $1,000

The realisations charge payable is calculated as follows:

Amount realised = $10,000 (business assets net of GST) + $300,000 (interest in deceased estate) = $310,000
Permitted deductions = $0
Amount on which RC is payable = $310,000
RC Payable = $310,000 x applicable RC rate

Note: In the above example the GST refund is not subject to the realisations charge as the refund is arising out of monies on which the RC has effectively been paid. The principle to be applied is that monies that have 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

3.23 The trustee has sold 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.

3.24 In this administration, the RC payable is $6,021, calculated as follows:

Cost of administration         $10,000
Trustee’s fees                                    $20,000
Dividend                                 $50,000
Total debts & costs              $80,000

RC payable = 80,000 x 7/(100-7) = 6,021

The realisation charge payable is calculated based on the amount of debts and costs for annulment, using the grossing up formula of:

(total debts + costs) x RC rate / (100 – RC rate))

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

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

3.25 The trustee has sold the bankrupt’s unencumbered motor vehicle for $20,000. After payment of the selling agent’s costs and commission the trustee has received a net amount of $18,000 in the estate. The allowable value of a primary means of transport which a bankrupt can retain is say $7,700 (see AFSA website for the current indexed amount).

3.26 The RC payable is calculated as follows:

Amount realised = $20,000 (gross sale value) – $7,700 (being non divisible amount) = $12,300
Permitted deductions = $0
Amount on which charge is payable = $12,300 – $0 = $12,300
RC payable = $12,300 x applicable RC rate

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

3.27 The 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 cost was $12,000.

3.28 The RC payable is calculated as follows:

Amount realised = $12,000
Permitted deductions = $0
RC payable = $12,000 x applicable RC rate.

Example 13 RC calculation on funds received from other bankrupt estate

3.29 The trustee receives a dividend paid from another bankrupt estate in the amount of $2,000.  Realisations charge is not payable on this receipt as it has already been paid on the funds received by the trustee of the other bankrupt estate.