Does bankruptcy clear tax debt in Australia?

What bankruptcy does to an ATO debt

In bankruptcy the ATO is an unsecured creditor, the same as a credit card company. From the date you become bankrupt:

• Collection stops. The ATO cannot keep chasing you for the debt, and a garnishee notice or court action over a provable debt falls away.
• Interest stops counting against you. GIC on the pre-bankruptcy debt is not a debt you have to pay after discharge.
• Your trustee deals with the ATO. The ATO lodges a proof of debt and gets a share of whatever the trustee recovers, alongside your other creditors.
• On discharge, the unpaid balance is released. It is no longer owed and the ATO cannot revive it later.

This applies to debts that are personally yours: income tax, a sole trader's GST and PAYG, PAYG instalments, and a director penalty that has already become your personal debt.

What bankruptcy does not clear

A few things sit outside the release, and they catch people out:

• New tax. Tax on income you earn after the bankruptcy date is a fresh debt. You still have to lodge and pay during bankruptcy.
• Fraud. A debt incurred by fraud is not released, so a tax bill that came from deliberately hidden income can follow you out.
• Court fines and penalties. A penalty imposed by a court, for example after a prosecution for not lodging, is not released. Ordinary ATO administrative penalties are.
• Company debts. Your bankruptcy does nothing to a debt that belongs to your company. If the company cannot pay, that is a question for liquidation, and any director penalty is a separate personal debt.

The full list is on which tax debts survive bankruptcy.

What it costs you

Clearing the debt is real, but so is the price. Bankruptcy normally runs 3 years and 1 day and can be extended to 5 or 8 years if you do not cooperate. During it, you pay half of any after-tax income above an indexed threshold (roughly $70,000 for someone with no dependants, more with dependants) to your trustee. Assets above modest limits, including equity in a home, go to the trustee. Refunds for pre-bankruptcy years are the trustee's, and the ATO may keep them anyway: see what happens to my tax refund in bankruptcy. Your name stays on the National Personal Insolvency Index permanently, your credit file carries it for at least five years, and you cannot be a company director while bankrupt.

The cheaper options to rule out first

Bankruptcy is the last door, not the first. Before it, most people can look at a payment plan (online for debts up to $200,000), remission of interest, release for serious hardship on income tax, or a debt agreement or personal insolvency agreement that settles for less without a full bankruptcy. Our page on bankruptcy versus negotiating with the ATO walks through which one tends to fit which situation.

What to do next

1. Write down every tax debt you owe personally and every one that belongs to a company, because bankruptcy only touches the first list.
2. Check whether a payment plan, interest remission or hardship release could deal with the debt before you go near bankruptcy.
3. Talk to a free financial counsellor or a registered trustee about what you would actually give up in income, assets and refunds over the 3 years.

More questions: 16 Bankruptcy, liquidation and SBR questions questions answered · Full guide: Liquidation & ATO debt