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Does Bankruptcy Clear Tax Debt in Australia?

Does Bankruptcy Clear Tax Debt in Australia?

Does Bankruptcy Clear Tax Debt in Australia?

Bankruptcy can be a challenging experience as you formally declare that you can no longer pay your debts. While you might be trying to figure out the process, it is also essential to factor in the tax debt in Australia during your bankruptcy.

When you are declared bankrupt, you get released from the majority of your tax debts and other financial debts. However, you still have certain obligations regarding your tax return, just as you did before your bankruptcy.

Let’s have a closer look at how bankruptcy impacts your tax debt.

Bankruptcy and Tax Debt: What Happens to Your Taxes When You Go Bankrupt?

Whatever outstanding tax debts you might have till the date you have been declared bankrupt will be cleared. Whether this debt has or hasn’t been calculated, it will be removed. As a result, you won’t have to file your tax returns before you file for bankruptcy.

The outstanding returns can be filed after the bankruptcy’s commencement. ATO would clear off all your tax debts until that date once you file the returns. You must also keep in mind that any debt related to the income you earn after the bankruptcy’s commencement won’t be cleared and must be paid as usual.

While you won’t have to file for your tax returns before you file for bankruptcy, you would still be legally obliged to file all outstanding tax returns. Bankruptcy isn’t a reason not to file the returns, nor should you hesitate to file all outstanding returns as all the money you owe to ATO would already be highlighted in the bankruptcy.

The taxes owing includes all the monies you personally owe to the ATO and the monies you are liable to pay because your company couldn’t pay the debts.

What Happens If You Don’t File Tax Returns?

One thing you need to be careful about is not lodging the outstanding tax returns to the ATO as you can otherwise be prosecuted through court for non-lodgement. When this happens, you would have to pay a court fine.

Another thing to keep in mind is that any court fine you receive is not provable debt when it comes to bankruptcy, meaning you have to pay the fines if you receive it. The best way to avoid this is to ensure you lodge all the outstanding returns as soon as you can.

There is no need to keep the tax returns updated when filing for bankruptcy. If you file tax returns showing tax liability from before your bankruptcy, it will be added to the bankruptcy.

Bankruptcy Due to Unpaid Taxes: Receiving Bankruptcy Notice from the ATO

In case you receive a notice of bankruptcy from ATO, you would have to pay the tax debt or create a payment plan within 21 days. What happens if you are unable to make the payment or follow the payment plan? The tax authorities might file a petition to make you go bankrupt.

Usually, the ATO doesn’t seek to get anyone bankrupt if it is clear that you can repay all the debt within a given time. However, if you are unable to make the payment or if ATO determines you can’t repay all your debts, you would face a bankruptcy action by ATO. It is crucial to get in touch with a bankruptcy expert to ensure you follow the right steps.

Creditor’s Petition by the ATO

Creditor’s petition is a formal application to the Federal Magistrates Court or Federal Court by the ATO for a sequestration order to declare an individual bankrupt.

The ATO or other tax authorities have the right to file for this petition in case you have failed to comply with a bankruptcy notice or done any other act of bankruptcy within six months.

When the court gives the sequestration order, you become bankrupt. After this, a trustee would be appointed to handle all your assets and estate. Most of your assets would be sold to repay the ATO and your creditors.
However, all of this can be avoided if you can prove that you have the ability to pay all the debts immediately.

Receiving Tax Refunds in Bankruptcy

The conditions changes depending on your individual circumstances. It is essential for you to immediately inform the trustee when you receive the tax refunds. You would have to submit the ATO Notice of Assessment copy as well.

Keep in mind that you must not spend the tax refund until an assessment has been made by your trustee and you have been informed whether they have any claim on the refund. The following will be calculated by the trustee:

⦁ Refunds for any income that you earned before you became bankrupt are assets that can be claimed by the trustee.
⦁ Refunds for any income that you earned after you became bankrupt create part of assessable income for all your compulsory payments. In case the assessable income exceeds the specified amount, you might have to make compulsory payments.

Your trustee will make an assessment and inform you about the decision. Moreover, you would still have to file your tax returns to ATO during bankruptcy.

The ATO can keep your refunds during your bankruptcy only if you owe them tax debts or if you owe other commonwealth agencies, like family assistance or child support. Your tax refunds will be used to pay what you owe. The ATO still has the right to withhold the refunds even when those debts are listed in the bankruptcy.

Help With Bankruptcy and Tax Debt in Australia

Going bankrupt is not an easy scenario and it is crucial that you go through all other options first to resolve the problem and declare bankruptcy only when nothing else works. Bankruptcy can affect the credit permanently and even have an impact on your tax returns and refunds, depending on your situation.

All your refunds would have to go through your trustee to determine if they can claim the refunds. Therefore, it is wise to consult an experienced bankruptcy professional to guide you through the process. It will ensure that you make the right decisions and also avoid any further pitfalls, making the already challenging process easier. Get in touch with us for a free consultation.


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    Ross recently helped a bankrupt client who lives in a retirement village with her seriously ill husband.

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    The moneys paid represented about 75% of what would have been available to creditors if they waited two years.

    It is a win for the client and for the creditors.

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