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Does Bankruptcy Clear Tax Debt in Australia?

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 ato money or any Centrelink debt during your bankruptcy.

You can get ato debt forgiveness from most of your tax and other financial debts when declared bankrupt. However, you still have certain obligations regarding your tax return, just as you did before your bankruptcy.  There is ato relief from tax debt covid-19 related available, but this is coming to an end in 2022.

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?

Whatever outstanding tax debts you might have until 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. Kept 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 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 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 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 by instalments, garnishee 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 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.

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 notice of bankruptcy 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 make you go bankrupt.

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 if the ATO determine you can’t repay all your debts, then you could face a 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 for 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.

However, all of this can be avoided if you can prove that you can pay all the debts by other options  such as Debt Restructuring or a Debt Agreement,

Receiving Tax Refunds in Bankruptcy

The conditions changes depending on your circumstances. It would be best to inform the trustee when you receive the tax refunds immediately. 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 that you earned before you became bankrupt are assets that the trustee can claim.
  • Refunds for any income you earned after becoming bankrupt create part of 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 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.

Does Bankruptcy Clear Tax Debt in Australia?

“Going bankrupt is not an easy scenario, and “Does Bankruptcy Clear Tax Debt?”  is a common question. Bankruptcy can affect the 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 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 avoid other pitfalls, making the already challenging process easier.”

If you are seeking Bankruptcy advice in Sydney, Melbourne, Brisbane, Perth or anywhere around Australia. We can help you make informed choices before selecting your best options. Get a complimentary first consultation by calling 1300 887 210.  We can help answer your Tax and Bankruptcy questions.



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