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Everything you need to know about bankruptcy and taxes

There were 10,621 new personal bankruptcies between 2020 and 2021, including 6,792 bankruptcies. Financial difficulties, insolvency and bankruptcy are among the most stressful events in life that many of us hope to avoid. Whether you are experiencing a personal financial struggle or through your business, bankruptcy can be the ultimate goal.

If such financial difficulties are not stressful enough, the situation can seem dire when ATO calls. Don’t worry; We explain everything you need to know about bankruptcy and taxes.

consequences of bankruptcy

Bankruptcy could provide relief from inability to pay. However, it is not a solution to get out of prison. declare bankruptcy can have the following consequences:

  • You may be required to make forced payments, which can affect your income, employment, and business.
  • You may need to get permission from your trustee to travel abroad.
  • Your name will be permanently included in the National Personal Insolvency Index (NPII).
  • This may affect your ability to apply for credit in the future.
  • Bankruptcy doesn’t settle all debts – it may not cover Australian Taxation Office debts.

How does bankruptcy affect your taxes?

Bankruptcy occurs either by voluntary action or by a creditor when you are unable to pay your debts. After the declaration, a trustee will manage your affairs and may dispose of your assets to pay off debts. You may have to make periodic payments from your income.

Bankruptcy normally takes three years and one day from the day the Australian Financial Security Agency accepts your form.

You need to contact the ATO File for bankruptcy – or your trustee could file for bankruptcy on your behalf. Once you are aware of your bankruptcy status, the ATO will add the amount you should have paid to your previous income tax liability. You should discuss your tax obligations with a professional tax advisor or fiduciary.

Will bankruptcy eliminate tax liability in Australia?

In general, the tax is not exempt from bankruptcy. You must confirm with the ATO whether or not the bankruptcy will settle your tax debt. Typically, your debts include any income tax debts from previous fiscal years and the taxes you owe in the current tax year.

ATO may withhold the funds to settle the outstanding debt if you receive tax refunds during your bankruptcy. After your bankruptcy period, ATO cannot collect any remaining tax debts.

tax returns

You have to file a tax return as usual. Talk to your advisor or trustee about how you should complete the return. If you receive a tax refund that was paid before the bankruptcy, your trustee will claim it as an asset in your bankruptcy estate. Therefore, it is subject to payment by your creditors.

Your trustee will treat it as income if you receive a tax refund in respect of taxes paid during the bankruptcy. If the ATO is your creditor, they can withhold the refund. After filing for bankruptcy, you may keep any tax refunds.

It is in your best interest to file a tax return as soon as possible. The ATO performs a standard assessment of your tax liability if you are in arrears, which is unlikely to be convenient or accurate.

Capital Gains Tax

During bankruptcy, your trustee will likely sell some of your assets to pay off debts. The sale of real estate or assets triggers capital gains tax. Even if the trustee completes the action, the CGT Act treats the disposal as yours. Therefore, you are liable for CGT and must record the sale of assets on your tax return.

What if you run a business?

Business leaders can’t go bankrupt – only individuals or sole proprietors can. Regardless of your bankruptcy status, you are still required to submit BAS statements. If your company goes bankrupt, the ATO may send one Director fine notice (DPN). This makes you personally liable for the company’s tax liabilities, including:

  • Pay as you go (PAYG)
  • Retirement Guarantee Fee Liabilities (SGC).
  • Goods and Services Tax (GST)

Summarize

Understanding your tax obligations during bankruptcy is crucial. If you don’t file your tax returns, you could owe more in taxes than is just right. If you’re considering bankruptcy, make sure you file any outstanding repayments and understand what you owe.

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Fry Electronics Team

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