Frequently Asked Questions
Can I Keep My Tax Refunds While Bankrupt?
Whether you will be able to keep your tax refunds during bankruptcy will depend on your circumstances.
If your bankruptcy includes monies owing to the ATO, during the three years of your bankruptcy the ATO will not pay to you your tax refunds. Instead the ATO will pay that money off the tax debt that has been caught by your bankruptcy.
If your bankruptcy does not include monies owing to the ATO, then you will receive your tax refunds that pertain to the income you earn during your bankruptcy. What this means is that you will receive your tax refunds except in the Financial Year when you become bankrupt, you will only keep the portion of your refund that pertains to the period from when you received a bankruptcy number to the end of that financial year. The proportion of your tax refund that relates to the period from the commencement of that Financial year to the date when you became bankrupt is required to be paid to your bankrupt estate as it is a prebankruptcy asset.
The tax refunds you receive during your bankruptcy are classified as income. This will have no effect on you unless you are a high-income earner and required to pay income contributions during your bankruptcy. If you are required to pay income contributions, your tax refund will be added to your income before working out the income contribution you will be required to pay.
Further Reading: We recommend our article Wages Super and Spending which can be accessed here.