Can I keep my tax refund if I go bankrupt?

When you are first declared bankrupt you must disclose to your Bankruptcy Trustee all assets that you both currently hold, and expect to come into possession of. This includes any tax returns that you expect to receive, and depending on the date of your bankruptcy and how up to date your tax declarations are, you may be required to surrender your latest return.

The Bankruptcy Act deals with your tax matters in two time periods; there is the tax paid on income before the date that you are made bankrupt, and then for any periods after that date and during the term of your bankruptcy.

When you submit a tax assessment for income earned and tax paid before the date of bankruptcy, any return that you get is surrendered to your Trustee and put toward your bankrupt estate. If you end up owing an amount based on this “before date of bankruptcy” period, that debt gets included in your bankruptcy and you are not required to pay it. You need to note, however, that the Australian Taxation Office won’t actually consider you to be released from that debt until you have been discharged from bankruptcy (which is usually after three years, although it can be extended under certain circumstances). So although you won’t be required to pay it, any tax return that you receive during the period of your bankruptcy will most likely be held by the ATO and put toward the debt.

For tax assessments for income earned and tax paid after the date that you are declared bankrupt, any return that you get (unless it is held by the ATO for a previous debt) is counted toward your annual income. Your Bankruptcy Trustee assesses your income every year to see if you are liable to contribute payments to your bankruptcy. If you become liable for a tax debt after the date of your bankruptcy, you will be deemed responsible for that debt and you will be required to pay it.

Dealing with taxation matters under bankruptcy can be complicated, especially if you are declared bankrupt partway through the financial year or are behind in submitting your tax returns. For the best advice, call us here at the Australian Bankruptcy Service. Our CEO is a Registered Trustee in Bankruptcy, so you can call us with confidence, knowing that you will be getting the best advice. Our consultants are available now on 1800 462 767.




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