7.3.2.40 Waiver in Relation to Settlements

Summary

The FAO can agree to settle a debt (1.1.D.60) for less than the amount outstanding in the following situations:

• civil action,
• proceedings before the AAT,
• when 80% of the debt has already been recovered and the debtor cannot repay more,
• when the debtor offers to repay at least the present value of the outstanding amount, and it would take at least a year to otherwise recover the amount, and the debtor cannot repay more.

Where a debt has been settled for less than the value of the debt, the balance of the debt must be waived (1.1.W.10). More information about these situations is provided later in this topic.

Civil action

If legal action has been taken to recover a debt, and the Commonwealth has agreed to settle for an amount that is less than the full amount of the debt, the FAO must waive recovery of the balance of the debt.

Act reference: FA(Admin)Act section 100(1) Settlement of civil action

Proceedings before the AAT

If the FAO has agreed to settle a debt for less than the full amount of the debt in proceedings before the AAT, the FAO must waive recovery of the balance of the debt.

Act reference: FA(Admin)Act section 100(2) Settlement of proceedings before the AAT

80% of the debt already recovered

The FAO must waive recovery of up to 20% of the original value of the debt if the debtor:

• has repaid at least 80% of the original value of the debt, and
• is unable to repay the remaining balance (see example).
  • Example: Michael has a debt of $10,000. He has $8,500 in a bank account, but is unemployed with low job prospects. Recovery of his debt by deduction from his ongoing FTB entitlement would take a number of years. Michael offers to repay $8,500 in satisfaction of the debt. The FAO agrees to settle the debt, and waives recovery of the remaining balance of $1,500.

Act reference: FA(Admin)Act section 100(3) Waiver where at least 80% of debt recovered and debtor cannot pay more

Repayment of present value

The FAO may agree to settle a debt for less than the unpaid amount of the debt if:

• the debtor cannot repay more than the agreed amount, and
• it would take at least a year to recover the unpaid amount using another method of recovery.

The FAO must waive the difference between the agreed amount and the unpaid amount of the debt.

The rest of this topic provides information about calculating the present value of the debt.

Act reference: FA(Admin)Act section 100(4) Agreement for part-payment in satisfaction of outstanding debt, section 100(5) Limits on agreement to accept part-payment in satisfaction of outstanding debt

Working out the present value of the debt

The present value of the unpaid amount of a debt is worked out using the following formula:

Present value = (Annual repayment divided by interest) x (1 - (1divided by (1 + interest) ^{repayment period}))

The annual repayment is the amount of the debt that would have been recovered in a year if it were not being waived. The interest rate is declared by the Minister in a disallowable instrument (1.1.D.90). The interest rate is currently 10% per annum. The repayment period, expressed in years, is the number of annual repayments required to repay the unpaid amount.

Example: Stuart had a debt of $15,000. He has already repaid $3,000 leaving an unpaid amount of $12,000. Stuart offers to make a lump sum repayment of $8,200, and shows he is unable to repay more. The FAO works out that the annual repayment of the debt is $1,300 per year based on a repayment of $50 per fortnight. The repayment period works out to 9.23 years.

The present value of the debt is worked out as follows:

Present value = (Annual repayment divided by interest) x (1 - (1 divided by (1 + interest) ^{repayment period}))

= ($1,300 divided by 0.1) x (1 - (1 divided by 1.1 ^9.23))

• = $1,300 x (1 - 0.4149)
• = $1,300 x 0.585)
• = $7,606

As the amount offered to settle the debt is more than the present value of the debt, the FAO agrees to accept the lump sum in full satisfaction of the debt. Recovery of the remaining $3,800 is waived.

Act reference: FA(Admin)Act section 100(6) Formula for working out present value of unpaid amount

Family Assistance (Present Value of Unpaid Amount - Interest Rate) Determination 2000

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Last reviewed: 30 April 2012