What Happens to Your Tax Refund if You Have Debts to the Tax Office?

Many people have questions about what exactly happens during bankruptcy if part of their debt is with the ATO. Will they still get their refund? Or can the ATO claim it right back

While it does depend on your circumstances, the most basic way to look at it is this: tax refunds for the income you earn before you enter bankruptcy is an asset your trustee can claim and refunds for the income you earn after you enter bankruptcy form part of your assessable income for compulsory payments.

If the ATO is a creditor in your bankruptcy, they have the right to keep your tax refund in order to satisfy your debt during your undischarged period. They can only do this during your bankruptcy term, once your bankruptcy is discharged, they cannot withhold any refunds as pre-sequestration debt is considered to be irrecoverable at law and is written off. It’s also important to note that the ATO can only withhold refunds if you owe a debt to them, or another Commonwealth agency and they do not have the right to withhold other refunds.

As previously mentioned, tax refunds attributable to income earned before the date of your bankruptcy are classed as assets and this can be claimed by the trustee and it’s important to note this is true, regardless of when you actually receive the refund. Additionally, refunds of any nature received by you during an undischarged bankruptcy period must be disclosed to your trustee in your annual assessment of income as some refunds, including tax refunds are classified as income and will form part of your assessment.

For professional bankruptcy advice, contact the experts at Bankruptcy Debt Help today. Regardless of your circumstances, we can give you non-bias advice and help steer you in the right direction.

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