What bankruptcy trustees must do

Step 1: Work out if you need a TFN

You are required to meet certain tax obligations under section 254 of the Income Tax Assessment Act 1936, which depends on whether:

• you have derived income, profit or capital gains
• you have not derived income, profit or capital gains.

You have derived income, profit or capital gains

If you have derived income, profit or capital gains in a representative capacity as a bankruptcy trustee during the course of administering a bankrupt estate, you must apply for a TFN and lodge a tax return.

To apply for a TFN, you can either:

• apply online at abr.gov.au
• complete the form Tax file number – application for companies, partnerships, trusts and other organisations (NAT 3799).

When applying for a trust TFN as a bankruptcy trustee, select ‘Discretionary Trust – Services Management’.

You have not derived income, profit or capital gains

If you have not derived income, profit or capital gains in a representative capacity as a bankruptcy trustee, do not apply for a separate TFN.

Step 2: Work out if you need an ABN

You don’t have to apply for an Australian business number (ABN) for every estate you administer. It depends on whether the:

• individual ceases carrying on an enterprise
• individual continues carrying on an enterprise.

Individual ceases carrying on an enterprise

In most cases the individual ceases to be carrying on an enterprise in Australia when they become bankrupt. Therefore, they cease to satisfy the conditions to have an ABN. In this case, you don’t apply for a separate ABN.

Individual continues carrying on an enterprise

In a small number of cases, an individual may still carry on in the same enterprise. This is sometimes the case, particularly for taxi drivers and solicitors. If the individual carries on in the same enterprise, you must use a separate ABN.

If your appointment was:

• before 1 April 2002, use the insolvent individual's ABN when administering the estate
• on or after 1 April 2002, apply for a separate ABNExternal Link in the normal manner and use it for all matters arising under the administration.

Step 3: Bring past tax affairs up to date

It is important that a debtor's tax affairs be brought up to date before:

• paying a dividend in bankruptcy
• putting a proposal to creditors under Part IX, X or section 73.

Ask the debtor to lodge outstanding returns, activity statements or other documents so you can determine their total pre-sequestration tax liability.

We can raise default assessments for the outstanding returns if either:

• the debtor is uncooperative
• there is some likelihood that the lodgment of those returns will take so long that it will cause an unreasonable delay in the lodgment of the proof of debt.

For legal sources on default assessments, see:

• Law Administration Practice Statement PS LA 2007/24 Making default assessments: section 167 of the Income Tax Assessment Act 1936
• income tax – section 167 of the Income Tax Assessment Act 1936
• fringe benefits tax – section 73 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)
• superannuation guarantee – section 36 of the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992)
• indirect taxes (goods and services tax, wine tax, luxury car tax) – section 155-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Step 4: Put tax affairs in order

To put the tax affairs in order, you need to:

• consider PAYG withholding obligations
• consider income tax obligations
• lodge a tax return
• pay the tax liability
• be aware how we apply credits against tax debts.

PAYG withholding obligations

You need to be aware of your administrative obligations under the pay as you go (PAYG) withholding system if you are either a:

• receiver appointed to personal property
• trustee of a bankrupt estate, Part X or personal insolvency agreement.

These obligations also apply to payments made under the Fair Entitlement Guarantee (FEG).

For information, see PAYG withholding for external administrators and trustees of bankrupt estates.

Income tax obligations

Consider income tax obligations around:

• pre- and post-sequestration
• if you derive income, profit or capital gains.

Pre- and post-sequestration

Income tax for the period from the start of the year before sequestration to the end of the day of sequestration is provable debt in bankruptcy. This was a result of the decision of the Full Federal Court, in Deputy Commissioner of Taxation v Jones (1999) FCA 308.

In these circumstances, we may need to issue split assessments to the bankrupt individual for both the pre- and post-sequestration parts of the financial year.

This decision also affects Part IX and Part X debtors.

If you derive income, profit or capital gains

If you derive income, profit or capital gains in a representative capacity on behalf of a bankrupt individual, both you and the bankrupt individual have income tax obligations in relation to this amount. The bankrupt must lodge their annual individual income tax return as usual. They must include all sources of income, profit and gains.

Agents and trustees have obligations under section 254 of the Income Tax Assessment Act 1936.

You must make returns, be assessed, and retain money to pay the tax on any income, profit or capital gains made in a representative capacity. We will apply individual marginal tax rates and the tax-free threshold and issue a Notice of Assessment. The assessment gives you certainty about how much to retain.

If both you and the bankrupt individual lodge and are assessed, we can validly issue assessments to both you and the bankrupt individual in relation to the same income, profit or gains. We can only collect the assessed amount once.

Lodge a tax return

To report the income, profit or gains that you have derived in a representative capacity, you must lodge a trust tax return.

Use the Trust tax return instructions 2022 to help you complete the tax return.

We may use information you provide in the trust tax return to adjust the bankrupt individual’s tax return.

Pay the tax liability

If we:

• have issued a relevant notice of assessment, you must
  • retain sufficient money for the tax liability
  • pay the tax liability
   
• haven’t issued a notice of assessment, you don’t have to retain money and pay.

The amount you must retain and pay is limited to:

• the amount of assessed tax that we may legally recover, and
• the amount that is available to you at the time of the relevant assessment and which subsequently comes to you.

For legal sources on trustees' lodgment, retention and payment obligations, see:

• Section 254 of the Income Tax Assessment Act 1936
• Commissioner of Taxation v. Australian Building Systems Pty Ltd (In Liquidation) (2015) 257 CLR 544 (Australian Building Systems)
• Decision impact statement: Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation)
• Taxation Determination TD 2021/5 Income tax: a receiver's obligation to retain money for post-appointment tax liabilities under section 254 of the Income Tax Assessment Act 1936
• Law Administration Practice Statement PS LA 2011/15 Lodgment obligations, due dates and deferrals
• Taylor v. Deputy Federal Commissioner of Taxation 87 ATC 4441
• Law Administration Practice Statement PS LA 2011/21 Offsetting of refunds and credits against taxation and other debts.

Personal liability

You are personally liable for the tax payable if all of the following apply:

• You are a bankruptcy trustee.
• There is an assessed tax liability.
• You fail to retain enough money to pay the assessed tax liability.

Your exposure to personal liability is limited to the amount:

• of assessed tax that we may legally recover, and
• that is available to you at the time of the relevant assessment and that subsequently comes to you.

Application of credits

We will apply excess credits – such as credits for pay as you go (PAYG) withheld amounts – to reduce any liabilities owed to us before:

• you can refund any remaining balance to the debtor
• the bankrupt is discharged from bankruptcy
• the Part IX or X debtor is released from their debts.

This applies to pre- and post-sequestration and Part X.

The exception is where credits arise from periods of income before sequestration or execution of a Part X. In this case they will be offset even if the relevant assessment is made after these events. We will also offset credits regardless of whether the taxpayer is discharged or released.

Assuming no post-bankruptcy debts have been incurred, any excess credits arising after discharge or release will be refunded.

The relevant legal sources are:

• Taylor v. Deputy Federal Commissioner of Taxation v 87 ATC 4441
• Law Administration Practice Statement PS LA 2011/21 Offsetting of refunds and credits against taxation and other debts.

The steps you must take as a trustee appointed under the Bankruptcy Act 1966.