Does bankruptcy clear tax debt in Australia?
Bankruptcy can be a challenging experience, but it is also essential to factor in what happens when you owe the company money or any Centrelink debt during your bankruptcy.
When declared bankrupt, you can get debt forgiveness from most of your taxes and other financial debts. However, you still have certain obligations regarding your tax return, just as you did before your bankruptcy.
It’s a common question: “Does bankruptcy clear tax debt? So, 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?
Any outstanding tax debts you might have until 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. Remember 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 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 owed include all the monies you personally owe to the ATO and the ones you are liable to pay because your company couldn’t pay the debts.
Does bankruptcy clear Centrelink’s debt?
If you owe a Social Security debt and then become bankrupt, you do not have to repay the debt during bankruptcy. Centrelink cannot take deductions from your payments, require payments in instalments, garnish your bank accounts, or take court action to recover the debt.
What Happens If You Don’t File Tax Returns?
You must be careful about not lodging the outstanding tax returns with the ATO, as you can otherwise be prosecuted through court for non-lodgement. When this happens, you will have to pay a court fine.
As with any court fine you receive, it is not considered provable debt when it comes to bankruptcy, meaning you must pay the penalties. The best way to avoid this is to ensure you lodge all the outstanding returns. 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
If you receive a bankruptcy notice from ATO, you must pay the tax debt or create a payment plan within 21 days.
If you cannot make or follow the payment plan, the tax authorities might file a petition to bankrupt you.
Usually, the ATO doesn’t seek to get anyone bankrupt if you can repay all the debt within a given time. However, if you cannot make the payment or the ATO determines you can’t repay all your debts, you could face bankruptcy action from the ATO.
Creditor’s Petition by the ATO
A 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 this petition if 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.
Receiving Tax Refunds in Bankruptcy
The conditions change depending on your circumstances. It would be best to inform the trustee immediately when you receive the tax refunds. You would have to submit the ATO Notice of Assessment copy as well.
Remember that you must not spend the tax refund until your trustee has made an assessment and you have been informed whether they have any refund claims. The trustee will calculate the following:
- Refunds for any income you earned before becoming bankrupt are assets the trustee can claim.
- Refunds for any income you earned after becoming bankrupt create part of your assessable income for all your compulsory payments. You might have to make mandatory payments if the assessable income exceeds the specified amount.
Your trustee will make an assessment and inform you about the decision. Moreover, you would still have to file your tax returns with the 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 bankruptcy.
Does bankruptcy clear tax debt in Australia?
“Going bankrupt is not an easy scenario, and “Does bankruptcy clear tax debt? It is a common question. Bankruptcy can affect your credit permanently and even impact your tax returns and refunds, depending on your situation. All your ATO refunds would have to go through your trustee to determine if they could claim the refunds. Therefore, consulting an experienced bankruptcy professional to guide you through the process is wise. It will ensure that you make the right decisions and avoid other pitfalls, making the already challenging process easier. So why not contact us for a free consultation today?”
Andrew Bell Bankruptcy Advisor
With over 30 years of experience in debt solutions and bankruptcy in Australia Andrew can find a solution for you.
“Nothing is more satisfying to me than knowing that I’ve helped someone get back on their feet by guiding them through the Bankruptcy Process. Rest assured, you’re in good hands with me as we solve your financial problems together.”