Dealing with debt can be overwhelming, and when it comes to Australian Taxation Office (ATO) debts, the situation can feel even more complicated. Many people facing financial hardship wonder: Does bankruptcy clear ATO debt in Australia?
In this blog, we’ll explore how bankruptcy affects your ATO debt, the types of tax debts that can or cannot be cleared, and what you need to know before considering bankruptcy as an option for dealing with your tax debts.
Understanding Bankruptcy in Australia
Bankruptcy is a legal process that occurs when an individual is unable to pay their debts and applies to the Australian Financial Security Authority (AFSA) for relief. When declared bankrupt, an individual’s assets and income are typically controlled by a trustee, who uses them to repay creditors over a period of time. Bankruptcy in Australia generally lasts for a period of 3 years, after which most of the individual’s debts are discharged.
However, not all debts are cleared through bankruptcy. Some debts, such as those that relate to family law, child support, or fraud, are excluded from bankruptcy discharge.
Does Bankruptcy Clear ATO Debt in Australia?
The answer is partially yes, but it depends on the type of debt you owe to the ATO. While bankruptcy can clear certain ATO debts, there are specific types of debts that may not be discharged during the bankruptcy process.
1. Income Tax Debt
In most cases, income tax debt can be included in bankruptcy and cleared when the bankruptcy period ends. If you have tax debt from underpaid income tax, including assessments for prior years, bankruptcy may eliminate these debts. This can provide significant relief, especially if you have accumulated a large amount of tax debt over time.
2. Goods and Services Tax (GST) Debt
GST debt is generally treated the same way as income tax debt. If you are declared bankrupt, any outstanding GST obligations, including tax debts arising from business activities, may be cleared. However, it’s important to note that you may still need to account for your business’s financial dealings during the bankruptcy process.
3. Pay As You Go (PAYG) Withholding Debt
PAYG withholding debts, which occur when an employer withholds tax from employees’ wages and fails to pay it to the ATO, are typically included in bankruptcy. If the debt is considered income tax debt, it will likely be discharged.
4. Superannuation Debts
In some cases, if you owe unpaid superannuation contributions to employees, these debts may not be cleared by bankruptcy. Unpaid superannuation contributions are often treated as a priority debt and may not be discharged during the bankruptcy period. However, if the super debt is tied to income tax, it may be eligible for discharge.
5. Fines and Penalties
The situation becomes more complex when dealing with ATO penalties. Fines and penalties imposed by the ATO for non-compliance or late payment are usually not discharged in bankruptcy. If you have incurred substantial ATO penalties, these debts will likely remain after your bankruptcy ends. The ATO is unlikely to forgive fines for actions like fraud, tax evasion, or deliberate underreporting.
6. Fringe Benefits Tax (FBT) Debt
Fringe Benefits Tax (FBT) debt is another form of tax that can typically be discharged in bankruptcy, as long as it is related to income tax obligations. However, like income tax debt, any outstanding FBT debt that is due for a period prior to your bankruptcy may be included in the discharge.
7. Trustee Debts
If you owe the ATO for trustee debts, such as when you are a trustee for a company or a self-managed superannuation fund (SMSF), these debts can be more complicated. Generally, trustee debts are not discharged in bankruptcy, and you may still be held responsible for them.
Key Exceptions: When Bankruptcy Does Not Clear ATO Debt
While bankruptcy can clear many types of ATO debts, there are some notable exceptions where bankruptcy does not discharge these obligations. Here are some cases where your ATO debt may not be cleared through bankruptcy:
1. Fraudulent or Deliberate Tax Evasion
If the ATO determines that your tax debt resulted from fraudulent actions or deliberate tax evasion, the debt is not eligible for discharge in bankruptcy. The ATO may pursue these types of debts even after bankruptcy proceedings are complete, as they are considered serious legal violations.
2. Superannuation Guarantee Charge (SGC)
The ATO is also unlikely to discharge any debts related to unpaid superannuation guarantee charges (SGC). If your business has failed to pay superannuation contributions for employees, these debts are not discharged by bankruptcy.
3. Child Support
While not directly related to tax, child support debts are considered a priority debt and are not discharged in bankruptcy. If your tax debt is related to child support payments that were withheld by the ATO, these debts will not be cleared by bankruptcy.
What Happens After Bankruptcy?
Once you are declared bankrupt, the ATO debt that is eligible for discharge will generally be cleared at the end of the bankruptcy period. However, any remaining debts that are excluded from bankruptcy, such as fines, penalties, or certain superannuation debts, will still need to be repaid.
It’s also important to note that if the ATO has already taken action against your property, bank accounts, or wages, these actions may continue until the debts are fully resolved.
What Should You Do Before Filing for Bankruptcy?
Before deciding to file for bankruptcy, it’s important to speak with a bankruptcy trustee or financial advisor to assess your options. They can help you understand the implications of bankruptcy on your ATO debt and other financial obligations. Additionally, you may want to consider alternatives to bankruptcy, such as:
- Negotiating a payment plan with the ATO to settle your debt over time.
- Seeking professional debt advice to explore options such as debt consolidation or refinancing.
In some cases, working out a payment plan with the ATO or seeking professional help can provide more favorable outcomes than filing for bankruptcy.
Conclusion
Does bankruptcy clear ATO debt in Australia? While bankruptcy can clear many types of ATO debts, such as income tax debt and GST obligations, it does not discharge certain debts, such as penalties, superannuation guarantee charges, and debts related to fraudulent tax evasion. Understanding the specific debts that are cleared during bankruptcy is crucial before making any decisions.
If you’re facing ATO debt and considering bankruptcy, it’s essential to seek professional advice to fully understand the implications and determine the best course of action. A bankruptcy trustee or financial advisor can help you navigate the process and explore alternatives to bankruptcy.
At Sydney Finance, we can help you understand your options for managing ATO debt, including payment plans and other debt relief strategies. Contact us today for expert guidance on resolving your tax debts and improving your financial situation.
FAQs
- Does bankruptcy clear ATO debt in Australia?
Yes, bankruptcy can clear certain ATO debts, such as income tax debt, but it does not clear all debts, such as penalties, superannuation guarantee charges, or fraudulent tax debts. - What types of ATO debts are not cleared in bankruptcy?
ATO debts related to fraud, superannuation guarantee charges, and child support are generally not discharged in bankruptcy. - Can I apply for a payment plan with the ATO instead of going bankrupt?
Yes, the ATO offers payment plans to help manage tax debts over time. It’s often a better option than filing for bankruptcy. - What happens to my assets during bankruptcy if I have ATO debt?
If you are declared bankrupt, a trustee may seize assets to pay off your creditors. However, ATO debt that is cleared through bankruptcy will be forgiven at the end of the bankruptcy period. - Should I consider bankruptcy to clear my ATO debt?
Before filing for bankruptcy, it’s important to seek professional advice to understand the consequences and explore other options, such as negotiating a payment plan with the ATO.