Does Bankruptcy clear Tax Debt in Australia?

While entering bankruptcy can be difficult, it’s also important to consider what would happen if you still owe Centrelink or the ATO money after filing for bankruptcy. Most of your financial debts, including tax debts, can be erased when you are declared bankrupt. You may still have some tax-related obligations, just like you did before your bankruptcy, though.

“Does bankruptcy clear tax debt?” is a frequently asked question. Let’s explore how bankruptcy affects your tax debt in more detail.

What will Happen to Your Taxes If You File for Bankruptcy?

You will be clear of any unpaid taxes you may have had up until your bankruptcy filing. It won’t matter if this debt has been calculated or not—it will be eliminated. As a result, you won’t be required to file your tax returns before declaring bankruptcy.

After the bankruptcy is filed, the unfiled returns can be submitted. Once you file the returns, the ATO will pay off all of your tax debts owed up to that point. Bear in mind that whatever debt that is tied to money you earn after bankruptcy starts won’t be discharged; it will still need to be paid.

Although you are not required to file your tax returns before declaring bankruptcy, the law still requires you to file all unfiled tax returns. All the money you owe the ATO will be brought up in bankruptcy, so filing late returns is not discouraged by bankruptcy. The taxes due are made up of all the money you individually owe the ATO and the taxes you are responsible for paying since your company could not pay its bills.

What Happens if Tax Returns Aren’t Filed?

You should be careful not to fail to file the unfiled tax returns with the ATO since failing to do so could result in legal action being taken against you. A court fine would be imposed upon you if this occurred.

You must pay the fines because, like any court fine, they are not regarded as provable debt in the context of bankruptcy. Assuring that all unfiled returns are lodged is the best prevention strategy. If you file tax returns that include tax debt from before you filed for bankruptcy, that debt will be included in the bankruptcy.

Unpaid Taxes Cause Bankruptcy: Receiving a Bankruptcy Notice from the ATO

If the ATO issues you notice of bankruptcy, you have 21 days to pay the tax obligation or devise a payment strategy. The tax authorities can submit a petition to have you declared bankrupt if you fail to pay your debts or adhere to the payment plan.

The ATO often won’t pursue bankruptcy against you if you can pay off the entire debt within a specific time. However, the ATO may take bankruptcy proceedings against you if you cannot make the payment or if they judge that you cannot pay back all of your debts.

Depending on your circumstances, bankruptcy may have an enduring influence on your credit and even impact your tax returns and refunds. For guidance through the procedure, speaking with an experienced bankruptcy professional at ABS is advisable. Call our toll-free hotline at 1800 462 767 right away.