Tax obligations in bankruptcy
Felicity is a 37-year-old unemployed woman from Dandenong in Victoria. She is currently single and has no children.
For 8 years, Felicity operated as sole trader running a small business as a pastry chef. Felicity struggled to stay on top of her bookkeeping and bills. As a result, personal and business debts built up until Felicity had no choice but to close the business.
Felicity ended up filing for bankruptcy. At the time she had not lodged a tax return for the past 4 financial years.
Felicity listed the Australian Taxation Office (ATO) as a creditor on her bankruptcy form. She did not know how much she owed because of her unfiled tax returns. She estimated on her form that it would be about $150,000.
AFSA contacted Felicity to talk about her bankruptcy. AFSA explained that Felicity still needed to lodge her overdue and future tax returns in the normal way. AFSA does not do this for her, and bankruptcy does not remove this obligation.
AFSA explained that most ATO debts are covered by bankruptcy. This means they do not have to be repaid (except in certain circumstances). The ATO would still be a creditor in the bankruptcy, which meant that if any money became available to pay creditors, the ATO would get a share.
However, any tax refund Felicity is entitled to during her bankruptcy may be kept by the ATO. The ATO would use this money to pay off some of her tax debt. This would reduce the ATO’s claim against Felicity’s bankrupt estate.
After Felicity’s bankruptcy ends, she doesn’t need to keep paying back any of the remaining tax debt from the period before she became bankrupt. She can also keep any future tax refunds after her bankruptcy ends.
Without the constant pressure of running her business and mounting debts, Felicity finally made an appointment with an accountant. She intends to get her outstanding tax returns lodged with the ATO in the next few weeks.
*These case studies do not constitute legal or financial advice. You should consider whether the options referred to in the case studies are appropriate for you, and seek advice if necessary, before taking any action.