When the federal government announced their tax offset earlier this month, many taxpayers, and those who are in bankruptcy, may have expected a higher tax refund this year, however this is not the case. The data-matching activities between government agencies means it is easier for the ATO to locate discrepancies and identify overpayments and debts owed to the government. Tax refunds to bankrupts are at risk of being taken and here is a list of some of the things to look out for: -
This year the ATO is withholding paying tax refunds until they have checked parents who receive the childcare subsidy correctly declared their income in the previous financial year against their 2018-19 tax return. What this means for parents who are also bankrupt, if they receive the childcare subsidy the ATO are withholding tax refunds until it has been verified that parents have not been overpaid for the previous financial year period. If a bankrupt was overpaid, their tax refunds can be used to repay this debt.
On a bankrupt’s tax file, the ATO usually has it marked “insolvent”. This automatically triggers the ATO to check their records for any previous tax debts. A bankrupt’s tax refund can be used to offset any ATO debt until their date of discharge. This process usually delays the payment of a tax refund to bankrupts, and if their tax debt outweighs the expected tax refund; bankrupts should expect to not receive a return at all.
During bankruptcy, it is the trustee’s duty to realise assets to repay creditors. However, some disposals give rise to Capital Gains Tax liabilities. The tax laws do not acknowledge that a bankrupt’s assets vest in the trustee, meaning bankrupts will need to record the sale of the asset in their tax return. They should contact their bankruptcy trustee to be provided this information.
Any refund from the ATO relating to income before bankruptcy it is an asset of the estate and will have to be paid directly to the bankruptcy trustee, regardless of when the bankrupt receives the refund. Any refund during bankruptcy will be included in a bankrupt’s income assessment. The bankrupt is able to use their refund to repay any outstanding income contribution liability owed to the bankruptcy estate.
Most people find tax time very stressful and adding the strain of financial struggles and bankruptcy it can be a very distressing situation.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.