What happens to my tax refund in bankruptcy?
Short answer
It depends on which year the refund belongs to. A refund for income earned before the bankruptcy date is an asset your trustee can claim, and the ATO can offset it against your pre-bankruptcy tax debt before anyone sees it. A refund for income earned after the bankruptcy date is generally yours, but it counts as income when your trustee works out contributions. After discharge, refunds are yours again. Details in bankruptcy and sole trader tax debt.
Three periods, three answers
| Refund relates to | Who gets it |
|---|---|
| Income earned before the bankruptcy date | The ATO offsets it against your pre-bankruptcy tax debt first; anything left is an asset of the trustee |
| Income earned during bankruptcy | You, but it is added to your income for the trustee's contribution assessment |
| Income earned after discharge | You, and the ATO cannot use it against a released debt |
The pre-bankruptcy rule applies even to refunds you had been counting on. If you were owed a refund for last year and had not lodged yet, do not plan on receiving it. The trustee, not you, is entitled to it, and the ATO's normal practice of keeping a refund to pay a debt still runs while the bankruptcy is on foot.
You still have to lodge
Bankruptcy does not pause your obligations to the ATO. You lodge every return on time, you tell your trustee when you have lodged, and you give them a copy of the notice of assessment. Lodging is also how the pre-bankruptcy debt gets a final figure and how the trustee knows whether there is a refund to collect.
For the year in which you become bankrupt, the refund or debt for that year usually gets split between the part of the year before the bankruptcy date and the part after. Your trustee handles the mechanics; you just need to lodge and let them know.
Counting on a refund that may not come?
A specialist can tell you what you would actually keep. Free and confidential.
Refunds while you are bankrupt
A refund for income earned after the bankruptcy date is not the trustee's asset, but it is income. That matters if you earn above the indexed threshold, because half of your after-tax income above that line goes to the trustee, and the refund is added to the tally. Someone earning well under the threshold keeps the whole refund.
Directors sometimes ask about company refunds. Those belong to the company and are unaffected by your personal bankruptcy. If the company itself is in trouble, our guide to liquidation and ATO debt explains how company credits are treated. And if you are on a payment plan instead of in bankruptcy, the refund rules are different again: see will my tax refund be taken on a payment plan.
What to do next
- Lodge any outstanding returns now, and tell your trustee when each one goes in.
- Assume any refund for a pre-bankruptcy year will not reach you, and budget without it.
- Keep a copy of every notice of assessment during the bankruptcy so the trustee's income assessment is based on the right figures.
Related questions
Can the ATO keep my refund even though the tax debt is in my bankruptcy?
Yes, while the bankruptcy is running. AFSA's guidance says the ATO can withhold refunds even where you have listed the tax debt in your bankruptcy. The refund is offset against the pre-bankruptcy debt. Once you are discharged and the debt is released, the ATO can no longer take a refund for that debt.
Will I get my tax refund after I am discharged from bankruptcy?
Refunds for income you earn after discharge are yours. The ATO cannot offset them against a debt that was released. If a refund relates to income earned during the bankruptcy and is assessed after discharge, the trustee may still have an interest in part of it, so check with them before you spend it.
Counting on a refund that may not come?
A specialist can tell you what you would actually keep. Free and confidential.
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