Life During Bankruptcy - Your Tax Debt
Bankruptcy permanently extinguishes your tax debt to the Australian Taxation Office (ATO).
You may be worried that the ATO will continue to chase you for taxes owing. This is an ill-founded worry, all taxes you owe will be gone permanently.
We summarise below what else you need to know regarding tax debt during bankruptcy.
Company Tax Debt Transferred to You
Monies you owe the ATO for taxes and superannuation guarantee liability from a company that failed are also captured and permanently gone.
ATO Garnishee Notices
If you are presently being chased for outstanding taxes by the ATO you should be careful. The ATO has the power to garnishee your assets like cash at bank and debtors. If this happens, your garnisheed assets will be lost and are not able to be recovered. This can be significant for your cash flow. The reason for concern is when you become bankrupt, debtors owing from your labour are retained by you and when collected are classified as your income. If your income is below the income threshold for income contributions to be paid, the debtors collected will be available for your living requirements. If you will be required to pay income contributions, only a small portion of the debtors collected will be lost. The rest will be available for you.
If you are being chased by the ATO for outstanding taxes, we recommend you consider bankruptcy prior to the ATO issuing a garnishee notice. This may make a material impact on funds available for your living requirements.
Outstanding Tax Returns
If you have outstanding tax returns to lodge, you can proceed to file for bankruptcy and then lodge your outstanding tax returns. When the returns are lodged, all taxes owing up to the date of your bankruptcy will be captured.
We often talk to people who have not lodged tax returns for the past few years and are stressed about collating their financial records to enable their outstanding returns to be prepared for lodgement. Once they have the protection of bankruptcy, that stress subsides – knowing that they will not have to pay the tax liability generated from preparation and lodgement of the returns.
It is important that you bring lodgement of your outstanding tax returns up to date. Whilst bankruptcy will catch all taxes you owe the ATO, it does not remove the requirement for you to lodge tax returns. The ATO can prosecute you through the courts for not lodging your tax returns. If this happens you are exposed to getting a court fine which you will have to pay from your wages.
We have never seen a person prosecuted for non-lodgement of tax returns after all outstanding tax returns have been lodged.
If you owe the ATO money, it is worth mentioning that the ATO will not pay your tax refunds to you during bankruptcy. Once you are discharged in 3 years’ time everything goes back to normal with tax refunds being paid to you.
If you do not owe the ATO money, you will receive your tax refunds as you normally would.
Tax Liability During Bankruptcy
Your tax debt up until when you become bankrupt is permanently extinguished. During bankruptcy, you are required to pay your taxes as they accrue based on your income and or business activity.
Once You Are Discharged from Bankruptcy
When you are discharged the tax debt does not return, it has been permanently extinguished. As you go forward, your only obligation is to pay taxes as they accrue based on your income and or business activity. You will receive your tax refunds without regard to whether you had a tax debt to the ATO that was extinguished by your bankruptcy; your life returns to normal.
To get further insight into how bankruptcy works, we recommend our article Getting On With Daily Life which can be accessed here