Any remaining tax debt incurred before your date of bankruptcy will be cleared once you file for bankruptcy. Even if you have not lodged all of your tax returns before filing for bankruptcy you will not be liable for ATO debt incurred before the date of bankruptcy. There are a few important things you need to know about your tax debt when declaring bankruptcy. We have broken them down for you.
Company Tax Debt Transferred to You
If you are a director of a company that cannot pay its taxes (PAYG, GST, Luxury Car Tax, and Wine Equalisation Tax) and/or Superannuation Guarantee liabilities, you may find that you become personally liable for those unpaid amounts. By filing for bankruptcy, you are no longer personally liable for those ATO debts, this includes unpaid company taxes and superannuation liabilities.
ATO Garnishee Notices
If you currently have tax debt owing to the ATO and are being chased for repayments, you need to be cautious. The ATO can and will garnishee your assets like cash at bank and debtors. Any assets garnisheed by the ATO will not be returned to you even if you file for bankruptcy. This could substantially impact your cash flow if you become bankrupt as you get to keep a portion of your cash at the bank and collect and keep your debtors when you become bankrupt. By declaring bankruptcy before the ATO issues you with a garnishee notice, it protects funds available for you, when you become bankrupt.
Outstanding Tax Returns
It is common for people to feel overwhelmed about lodging overdue tax returns. As mentioned previously you can lodge your outstanding returns after the date of bankruptcy. Many people find that having the security of bankruptcy reduces their stress as they are no longer responsible for paying the tax liability generated from the preparation and lodgement of the outstanding returns. It should be noted that regardless of bankruptcy you are still legally required to complete your outstanding tax returns. It is important that you do this to avoid prosecution. The consequences of which could mean being fined by the court which you will be required to pay from your wages. We have never seen this happen retroactively if you have lodged all outstanding tax returns. There is another reason to lodge your outstanding returns, the ATO cannot write-off your tax debt until it knows what the debt was. Completing the returns allows the ATO to write your debts off and gives you peace of mind.
If you have outstanding debt owed to the ATO, you will not receive any tax refunds during bankruptcy. In three years time when you are released from your bankruptcy, your tax refunds will return to normal, and they will be paid to you. If you don’t owe the ATO any money, your tax refunds will continue to be paid to you as standard.
Tax Liability During Bankruptcy
Any tax debt you have prior to becoming bankrupt is cleared by your bankruptcy. However, after the date of bankruptcy, you are again liable to pay taxes that are associated with your income and business activity.
Once You Are Discharged from Bankruptcy
When you are discharged from your bankruptcy, all debts included in your bankruptcy are finalised. You are free from any debt that you acquired before becoming bankrupt. The only thing you need to be mindful of going forward is paying taxes as they arise based on your income or business activity. If you owed money to the ATO, your tax refunds will return to normal. Everything will return to life pre-bankruptcy.