Can I keep my tax refunds while bankrupt? - Nicholls Co

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Can I keep my tax refunds while bankrupt?

Can I keep my tax refunds while bankrupt?

FAQs | What Happens When You Become Bankrupt?

If you owe money to the ATO they will keep your tax refunds until the debt is repaid or you are discharged from bankruptcy, whichever occurs first.

If you do not owe the ATO money then, you may be able to keep some or all your tax refund.

People usually become bankrupt part way through the financial year. If this is your situation, the portion of your refund that relates to the period prior to bankruptcy will be claimed by your bankrupt estate. The portion that relates to the period after commencement of your bankruptcy is classified as your income. If your income including the tax refund is below your income threshold you can keep all of the refund that relates to the post-bankruptcy period. If your income including the tax refund exceeds your income threshold then you will lose 50% of the amount by which your income exceeds the threshold.

Example:

Your income is $57,031.70 after tax
If you have no dependants your income threshold is $59,031.70
Your tax refund is $5,000
If you became bankrupt ¼ of the way through the financial year, then ¼ of your tax refund would belong to the bankrupt estate i.e $5,000 x 25% = $1,250. The other $3,750 is included in your assessable income.
Assessable income = $57,031.70 + $3,750
= $60,781.70

$60,781.70 less threshold $59,031.70 = $1,750 amount over the cap. Half of this excess amount ($1,750 x ½ = $875) belongs to the bankrupt estate the other $875 belongs to you.

In the second and third years of your bankruptcy all of your tax refund will form part of your income for income assessment purposes. If your adjusted income is below your income threshold you keep all of your refund. If your adjusted income exceeds your threshold, half the excess will belong to your bankrupt estate.

We recommend you talk to your trustee before spending your tax refund, to checkout whether it is all yours to spend or save.
For further information on bankruptcy, we recommend our articles ‘Pathways to Bankruptcy – Essential Facts’, ‘Life During Bankruptcy’ and ‘The Bankruptcy Option Explained’.

Nicholls & Co have a complementary ‘help desk’ to answer your questions on bankruptcy. Call 1300 060 122 or email your questions to helpdesk@nichollsco.com.au

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