Cost Recovery Impact Statement Personal Insolvency and Trustee Services 2013-14 and 2014-15

COST RECOVERY IMPACT STATEMENT

Personal Insolvency and Trustee Services

2013-14 and 2014-15

Amended to incorporate new and revised Fees and Charges from 1 April 2014 (including the introduction of fees for Debtors Petitions and Overseas Travel Requests and a revision of the rate of the Realisations Charge)

1. INTRODUCTION

1.1 Purposeof this Cost Recovery Impact Statement

The purpose of this Cost Recovery Impact Statement (CRIS) is to document changes to the cost recovery model for personal insolvency and trustee services provided by the Australian Financial Security Authority (AFSA). Specifically, the changes relate to the introduction of new fees for the processing of Debtors’ Petitions and Overseas Travel Requests commencing
1 April 2014, along with an increase in the rate for Realisations Charge commencing
1 July 2014. This CRIS will be updated on a regular basis and remains valid unless the activity or its cost recovery has ceased. This CRIS does not cover the cost recovery for the administration of the Personal Property Securities Register, which is documented in a separate CRIS available on AFSA’s website[1].

1.2 Description of the activity

AFSA has responsibility for the administration and regulation of Australia’s personal insolvency system and administration of the Personal Property Securities (PPS) Register. The Attorney-General’s Department has primary responsibility for personal insolvency policy and legislative instruments.
The services provided by AFSA include:

ensuring compliance by debtors, bankrupts and their associates, practitioners and others with the requirements of the Bankruptcy Act 1966 (Bankruptcy Act) and associated legislation by:
operating the bankruptcy registry where debtors’ petitions are lodged, debt agreement proposals are processed and public records on insolvency are maintained;
exercising Official Receiver powers to assist trustees to obtain information and recover property; and
investigating possible offences under the Bankruptcy Act and preparing briefs of evidence for prosecution
regulating the administrations and activity of trustees and debt agreement administrators;
administering on behalf of the Official Trustee, personal bankruptcies, debt agreements and personal insolvency agreements when private bankruptcy trustees or other administrators are not appointed;
acting as a special trustee for Australian Government agencies pursuant to court orders, particularly by locating, controlling and selling property under the proceeds of crime legislation; and
administering a national PPS Register as required under the Personal Property Securities Act 2009.

1.3 Commonwealth Government Cost Recovery

Cost recovery involves charging some or all of the efficient costs of specific government activities undertaken on behalf of the Commonwealth to individuals or non-government organisations that receive them. Commonwealth entities should minimise cost recovery charges through the efficient implementation of cost recovered activities, while achieving policy objectives and legislative functions of the Commonwealth Government. The Commonwealth Government Cost Recovery Guidelines are available on the Department of Finance website atwww.finance.gov.au.

2. POLICY AND STATUTORYAUTHORITY TO COST RECOVER

2.1Government policy approval to cost recover the activity

According to the Explanatory Memorandum for theBankruptcy Legislation Amendment (Fees and Charges) Bill 2006[2](the Bill)the principal objective of the amendments contained in the Bill, was to facilitate implementation by AFSA (at that point in time known as the Insolvency and Trustee Service Australia or ITSA) of cost recovery arrangements consistent with the Government’s cost recovery policy.
The introduction of charges for processing debtors’ petitions and overseas travel requests and increase in the rate for realisationscharge are consistent with the Government’s intention for AFSA to fully recover the costs of administering personal insolvency and trustee services. This decision was announced as part of the Mid-Year Economic and Fiscal Outlook (MYEFO) 2013-14 (p92).[3]

2.2Statutory authority to impose cost recovery charges

The Bankruptcy Actand the Bankruptcy (Estate Charges) Act 1997 provide AFSA with the legal authority to impose fees and charges for its activities. AFSA is also entitled to reimbursement of its costs, charges and expenses incurred in connection with the exercise of powers and performance of functions delivered by the Official Trustee in Bankruptcy.
The above legislation and Ministerial Determinations setting out the rates of applicable fees and charges can be found on the ComLaw website at www.comlaw.gov.au.

3.COST RECOVERY MODEL

3.1Outputs of the activity

Broadly, AFSA’s administration and regulation of Australia’s personal insolvency system and Official Trustee duties are categorised into the followingoutputs:
Personal insolvency registry and compliance activities

An efficient information and registry service
Timely and relevant information given to clients about options to deal with unmanageable debt and insolvency processes.
Assessment of applications for personal insolvency administrations and the issuance of notices for commencement of insolvency proceedings.
Maintenance of a register of personal insolvency administrations (National Personal Insolvency Index) which supports the community to make informed commercial decisions.

Regulation of personal insolvency practitioners

An effective regulatory framework for insolvency practitioners
Planned inspection program covering all personal insolvency practitioners to check standards of practice and identify systemic issues.
Review of decisions by, and complaints against, insolvency practitioners.
Registration and de-registration of insolvency practitioners to maintain high standards in practice.

Bankruptcy fraud investigations

Investigation of Bankruptcy Act offences
Investigation of offences under the Bankruptcy Act.

Estate administration

Administration of insolvent estates where private insolvency practitioners are not appointed
Reports provided to debtors, creditors and bankrupts.
Collection of monies to facilitate payment of dividends to creditors.

Management of assets held under proceeds of crime legislation

Administration of proceeds of crime property
Control and administration of property pursuant to court orders.
Maintenance of the Confiscated Assets Account in accordance with relevant requirements.

3.2Model assumptions

The forecast transaction volumes used in this documentare in line with historical volumes. Other than volumes referred within this CRIS to Overseas Travel Requests, the transaction volumes cited are identical to those quoted in the original 2013-14 CRIS. Table 1 provides an estimate of volumes for the two financial years covered in this CRIS.

Table 1: Estimated volumes by key activity groups*

Activity / 2013-14 Budget / 2014-15 Forecast
Information and Registry / 1,059,753 / 1,074,455
Bankruptcy Regulation** / 3,261 / 3,528
Estate Administration / 7,070 / 7,353
Bankruptcy Fraud Investigation / 1,790 / 1,890
Proceeds of Crime / 120 / 130
Total / 1,068,357 / 1,087,356
*Including government-funded activities
**Refers to bankruptcy practitioners regulation
The 2013-14 figures include 20,200 Debtors Petitions, of which 15,150 are government funded, as they are predicted to occur prior to cost recovery commencing for this service on 1April 2014. Furthermore, 2013-14 includes 4,850 Overseas Travel Requests, 3,637 of which are government funded, as they are predicted to occur prior to cost recovery commencing for this service on 1 April 2014.

3.3Efficient costs

In preparation for the initial 2013-14 and 2014-15 CRIS, AFSAundertook in late 2012, a review of its total operationsto ensure that budgeted and forecasted operational costs were valid and commensurate with AFSA management’sexpected workloads. Utilising an activity based costing model, this review included a time and motion study of the insolvency side of AFSA’s business, which captured information about call handling times for transactions and information enquiries. The outputs (referred to as services in the activity based costing model) were broken down into the key business processes (referred to as activities in the activity based costing model) that are required to deliver outputs.

Direct costs

Direct costs are assigned where they can be directly traced to an activity. Utilising a functional team structure, costs such as employee expenses and supplier costs were identified based on the activities of the functional team and allocated to the service provided.
A detailed analysis of IT costs was undertaken which identified direct costs associated with activities or services. These include such items as specific applications, dedicated servers and other hardware. Costs were allocated by identifying storage capacity, length of processes and activity volumes.

Indirect costs

Indirect costs represent all costs that cannot be directly attributed to a specific process. These costs are typically corporate functions, shared infrastructure capital costs and management responsibilities that cross over more than one output.
Indirect costs have been divided into a number of cost pools and attributed based on cost drivers. Cost drivers have been determined with reference to the functions of the cost pools and estimates of the consumption of resources in the activities undertaken. The cost drivers utilised are either staff based (full time equivalent FTE) or related to service/activity volumes.
The majority of corporate costs have been allocated on an FTE basis. These include property, human resources, governance and communications. Other corporate costs such as finance and IT were allocated using a combination of FTE and volumes where applicable. Finance costs that are volume driven include accounts payable and receivable and banking. IT costs identified as volume driven include items such as bandwidth and data storage.

Capital costs

Capital costs are identified as costs relating to the stability and performance of the IT systems as well as other asset costs (where applicable). Capital costs are a small portion of the overall costs of operations.
Tables 2 and 3 provide a detailed breakdown of costs by key activity groups (services)

Table 2: Cost estimates for 2013-14 financial year

Activity group / Direct costs / Indirect costs / Capital costs / Total Costs
$000 / $000 / $000 / $000
Information and Registry / 17,559 / 7,526 / 2,316 / 27,401
Bankruptcy Regulation / 3,377 / 1,447 / 445 / 5,269
Estate Administration / 10,468 / 4,486 / 1,381 / 16,335
Bankruptcy Fraud Investigation / 1,688 / 723 / 223 / 2,634
Proceeds of Crime / 675 / 289 / 89 / 1,053
Total / 33,767 / 14,471 / 4,454 / 52,692
Note: Capital costs are equal to depreciation expense

Table 3: Cost estimates for 2014-15 financial year

Activity group / Direct costs / Indirect costs / Capital costs / Total Costs
$000 / $000 / $000 / $000
Information and Registry / 18,037 / 7,729 / 2,308 / 28,074
Bankruptcy Regulation / 3,469 / 1,487 / 444 / 5,400
Estate Administration / 10,752 / 4,608 / 1,376 / 16,736
Bankruptcy Fraud Investigation / 1,735 / 744 / 222 / 2,701
Proceeds of Crime / 694 / 298 / 89 / 1,081
Total / 34,687 / 14,866 / 4,439 / 53,992
Note: Capital costs are equal to depreciation expense

3.4Charges for the activity

AFSA’s cost recovery charges include both fees and levies. Where cost effective and consistent with government policy objectives, AFSA charges direct fees for its services, such as the Official Trustee administration fee. Where it is not practicable or administratively efficient to charge users of AFSA’s services directly, the costs are recovered through the realisationscharge, which legally is a cost recovery levy.
Many of the fees and charges have not been changed since June 2006 apart from periodic updates applying to a small number of services in 2007 and 2010. In 2011 new activities were approved for cost recovery, including advertising of creditors meetings and the Infringement Notice Regime.

New Fees

This CRIS introduces fees for two services which were previously not subject to fees:

processing of Debtors’ Petitions commencing 1 April 2014; and
processing of Overseas Travel Requests for bankrupts administered by the Official Trustee also commencing 1 April 2014.

The Debtor’s Petition fee would recover the costs AFSA incurs in processing and assessing a debtor’s application for bankruptcy. The processing of Debtors’ Petitions involve the following processes:

ensuring the debtor has completed their forms correctly and completely;
ensuring the debtor has provided sufficient evidence to prove they are the person making the application;
ensuring the debtor is eligible to file a petition and not prevented from doing so (e.g. they are not already subject to a Debt Agreement);
ensuring another application to make the same debtor bankrupt by Creditor’s Petition doesn’t exist. (i.e. checking against the National Personal Insolvency Index is required to ensure a Sequestration Order has not been made covering the same debts as the application);
Ensuring the debts covered by the debtor’s application are not covered by an earlier bankruptcy application they made;
assessing if it is appropriate to reject their petition based on legislation (e.g. it appears they can pay their debts within a reasonable time and either they appear to be unwilling to pay or previously bankrupt at least 3 times or at least once in the last 5 years); and
ensuring there is no other application before the Court requiring a referral of the debtor’s application to be heard before a Judge for a determination on which petition to accept.

The fee would also cover the running costs of systems supporting the processing of Debtors’ Petitions.
The Overseas Travel Requests fee would recover the costs AFSA incurs in processing and assessing a request by a person to travel overseas while bankrupt. Under section 272 of the Bankruptcy Act, a person must obtain the permission of their trustee to travel outside Australia. When such a request is made to the Official Trustee, it is assessed by personnel within AFSA in the context of the circumstances of the individual, and risk the person being outside Australia will present to stakeholders.A trustee is able to deny overseas travel under certain circumstances, or alternatively impose conditions of travel, which may include payment of contributions or provision of information/documentation before departure or whilst overseas.
Any restrictions imposed are aimed at ensuring the proper administration of the bankrupt estate. The factors a trustee will take into account are:

whether the bankrupt has provided all information required by the trustee;
whether the bankrupt has been assessed for liability to make contributions from their income and, if so, whether the contribution payments up to date;
whether there are any outstanding matters which require the bankrupt’s presence in Australia for their resolution;
whether the nature of the travel is reasonable; and
how the travel is to be funded.

The fee would also cover the running costs of systems supporting the processing of the Travel Requests.

Increase in Realisations Charge

This CRIS introduces an increase in the Realisations Charge commencing 1 July 2014, from 4.7% to 6.0%. The Realisations Charge is used by AFSA as a means of covering the cost of services it provides for which it does not charge a direct fee.There are numerous activities which were previously funded by Government, but which will be paid for by the increase in the realisations charge.These activities include:

Processing Creditor Petitions and Declarations of Intentions;
Debt Agreements – Compliance;
Debt Agreements – Education;
Issue of Official Receiver Notices – s77(CA); and
Information provision.

Attachment 1 details the previous and current funding sources for all of AFSA’s activities.

Volumes and Forecasts

Tables 4A and 4B detail the volumes of Debtors’ Petitions and Overseas Travel Requests after the introduction of their respective fees on 1 April 2014.

Table 4A: Volumes of Debtors’ Petitions and Overseas Travel Requests

2013-14
Budgeted Units* / 2014-15
Forecasted Units
Debtors' Petitions / 5,050 / 20,200
Overseas Travel Requests / 1,213 / 4,850
*Note this table only includes volumes for transactions following the implementation of fees on1 April 2014. The expected volumes for the entirety of 2013-14 are:

Debtors’ Petitions: 20,200
Overseas Travel Requests: 4,850

Table 4B: Forecasted Revenue from New Fees

2013-14
Budget / 2014-15
Forecast
$000 / $000
Debtors' Petitions / 606.0 / 2,424.0
Overseas Travel Requests / 181.2 / 727.5
Table 5 details the forecasted increase in revenue arising from the increase in the realisations charge (which takes effect from 1 July 2014). There is no impact on the 2013-14 financial year.

Table 5: Forecasted 2014-15 Realisations Charge Revenue

2014-15
Original CRIS Forecast / 2014-15
Revenue from fee Increases / 2014-15
Revised CRIS Forecast
$000 / $000 / $000
Realisations Charge Revenue / 14,100.0 / 3,848.5 / 17,948.5
Table 6 details the estimated transaction volumes by key activity groups and the associated revenue for the 2013-14 and 2014-15 financial years. Attachment 2 provides further details.

Table 6: Revenue and volume estimates for 2013-14 and 2014-15

2013-14 / 2014-15
Type of charges / Volumes* / Revenue / Volumes / Revenue
$000 / $000
Fees
Information and Registry / 1,059,753 / 12,155 / 1,074,455 / 14,491
Bankruptcy Regulation / 3,261 / 485 / 3,528 / 520
Estate Administration / 7,070 / 10,025 / 7,353 / 11,172
Bankruptcy Fraud Investigation / 1790 / 24 / 1890 / 22
Proceeds of Crime / 120 / 481 / 130 / 525
Levies & Charges / 17,512 / 21,749
Total Revenue / 1,071,994 / 40,682 / 1,087,356 / 48,479
*Volumes include government funded Debtors’ Petitions and Overseas travel request prior to introduction of fees on 1 April 2014.

4. STAKEHOLDER ENGAGEMENT

As AFSA’s Portfolio Department, stakeholder consultation is performed by the Attorney General’s Department. The Attorney General’s Department will be communicating with stakeholders who are impacted by changes to fees and levies. There will be a formal consultation period throughout a time to be announced throughout February 2014, to give stakeholders an opportunity to provide feedback on the changes to AFSA’s fees. Leading into the consultation period, the Attorney General’s Department will distribute the draft CRISto the Bankruptcy Reform Consultative Forum which will outline key changes to fees and levies.
To ensure all potentially impacted stakeholders have the opportunity to provide feedback on fee changes, AFSA will undertake a broad distribution of the draft CRIS to all external stakeholder groups and communities. All feedback will be directed to the Attorney-General’s Department for consideration, ensuring a holistic consultation process.

5.FINANCIAL ESTIMATES

As detailed in section 2.1, AFSA is moving toward fully recovering the costs of administering personal insolvencies, Table 7 details the impact overall impact of the increases in fees and levies and the reduction of government subsidisation.

Table 7: Financial Impact of AFSA transitioning to being fully funded through cost recovery

Original CRIS Forecast / Revised CRIS Forecast
MYEFO increase to Fee/Levy / Government Funding / MYEFO increase to Fee/Levy / Government Funding
$000 / $000 / $000 / $000
2013-14 / N/A / 7,346 / 787 / 6,559
2014-15 / N/A / 7,086 / 7,000 / 0
Note: Full financial year data is shown.
Table 8 details the estimated expenses and revenue for 2013-14 and 2014-15.

Table 8: Financial Estimates

A / B / C / D
2013-14 / 2014-15 / 2015-16 / 2016-17
$000s / $000s / $000s / $000s
Cost Recovery Revenue / 40,682 / 48,479 / 49,593 / 50,366
Supplementation / 6,559 / - / - / -
Other Revenue / 1,500 / 1,685 / 1,500 / 1,500
Depreciation / 4,249 / 4,163 / 4,333 / 4,332
Expenses / 52,692 / 53,992 / 55,533 / 56,005
Balance / 298 / 335 / -107 / 193
Cumulative balance / 298 / 633 / 526 / 719