If you have a tax debt and enter bankruptcy, during bankruptcy any tax refunds will be kept by the ATO and set-off against your tax debt.

After discharge from bankruptcy, which is 3 years from acceptance of your Bankruptcy Form (formerly a ‘statement of affairs’) unless there is an objection to discharge, you will then resume receiving your tax refunds.

When you are “discharged” from bankruptcy, you are released from all debts that were “provable” in the bankruptcy. After commencement of the bankruptcy but before the discharge date, tax debts remain owing and the ATO will keep tax refunds and apply them against your tax debt: Taylor v DCT [1987] FCAFC.

However, note that when a tax refund relates to a pre-bankruptcy period, the ATO will keep the refund and set it off against the pre-bankruptcy debt, even after the discharge date. The ATO has a discretion when allocating the tax refunds it retains. But in our experience, the ATO often applies a tax refund against a post-bankruptcy before allocating it against the pre-bankruptcy debt.

An important point to note is that if, while bankrupt, you receive a tax refund for the post-bankruptcy period, the amount of that refund is included as part of your income for bankruptcy income contribution purposes. Further, if your tax refund arises from the pre-bankruptcy period and is not kept by the ATO, that refund is payable into the bankrupt estate.

Please contact Yulia Petrenko, or any of our friendly staff at Oracle Insolvency Services, if you have any queries.