Which tax debts survive bankruptcy?
Short answer
Very few. Income tax, GST, PAYG, GIC and ATO administrative penalties owed at the bankruptcy date are all released on discharge. What survives is tax on income earned after the bankruptcy date, a tax debt incurred through fraud, penalties imposed by a court, HELP and other student loans, and any debt that belongs to a company rather than to you. Our guide to bankruptcy and sole trader tax debt covers the rest.
Released or not: the list
| Debt | Released at discharge? |
|---|---|
| Income tax owed at the bankruptcy date | Yes |
| Sole trader GST, PAYG withholding, PAYG instalments | Yes |
| GIC, SIC and ATO administrative penalties on those debts | Yes |
| Director penalty already crystallised against you | Yes |
| Tax on income earned after the bankruptcy date | No, it is a new debt |
| Tax debt incurred by fraud | No |
| Penalty or fine imposed by a court | No |
| HELP, VSL and other government student loans | No |
| Your company's tax debt | Not yours, so not affected |
The ATO is listed by AFSA as a creditor whose debts should be confirmed with them when you fill in your statement of affairs. That is about getting the amount right, not about whether the debt is released.
The two that bite most often
Tax for the year you go bankrupt. Income tax is worked out on a full financial year, so the year of bankruptcy has a foot on each side of the line. Tax on income earned before the bankruptcy date is treated as a pre-bankruptcy debt; tax on income earned after it is yours to pay. Ask your trustee how the ATO is splitting that year, and do not assume the whole assessment is released.
Unlodged returns. If you have years of returns outstanding, the tax for those years is still a pre-bankruptcy debt once it is assessed, because the liability arose when the income was earned. But the ATO cannot prove the debt properly until the returns exist. Lodge them. It also protects you from a default assessment that overstates what you owe.
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Company debts and directors
Your bankruptcy is about your debts. A company's income tax, GST and PAYG stay with the company, and the way those end is through liquidation or a restructure, not your bankruptcy. What can cross over to you is a director penalty, an insolvent trading claim, or a personal guarantee. A penalty that has become your personal debt before the bankruptcy date is provable and is released. A lockdown DPN issued for the first time after your discharge is a new debt, which is one more reason to get the company's lodgements up to date before anything else. See does a DPN lead to bankruptcy.
What to do next
- Lodge any outstanding returns and BAS so every pre-bankruptcy debt can be proved at the right figure.
- Ask the trustee, in writing, how the ATO is treating the tax year in which you become bankrupt.
- If you are a director, deal with the company's lodgements now so a lockdown DPN cannot arrive later as a fresh personal debt.
Related questions
Does bankruptcy clear GIC and penalties?
Yes. General interest charge, shortfall interest charge and ATO administrative penalties that relate to pre-bankruptcy debts are provable and are released at discharge. The exception is a penalty imposed by a court after a prosecution, which is treated like any other court fine and survives.
Can the ATO chase me for a released tax debt after discharge?
No. Once a provable tax debt is released, the ATO cannot demand it, garnishee for it, or take you to court for it. It can, however, offset a refund against the debt while you are still bankrupt, and it can pursue any debt that was excluded from the release, such as a fraud debt or tax on post-bankruptcy income.
Not sure what bankruptcy would leave behind?
Get a clear list of what would and would not be released. Free and confidential.
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