3 Different Ways Taxes Will Affect Your Bankruptcy
What is the worst thing that can happen to your business? For many, that would be bankruptcy. This usually occurs because debt has been stacked so high, it could not be paid off anymore. Unfortunately, going bankrupt is not the only problem you face when your business does finally succumb to debt. Taxes still play a role in your bankruptcy and makes the entire situation even more of a headache.
Here is what you can expect to be doing with taxes once you go bankrupt:
1. Capital Gains Tax
In most cases, when you go bankrupt, your bankruptcy trustee will sell some of your assets, such as your property, to clear the debt that you have incurred so far. Any of the money that is made from the disposal of such assets will be subject to Capital Gains Tax (CGT).
As for recording the tax, all your CGT will still be registered under your name. That is because, under the law, the actions that the bankruptcy trustee takes to sell your property will be actions taken by you.
2. Tax Returns
When it comes to tax returns, you will carry out the same actions as if you did not go bankrupt. For instance, you will receive your refund from the Australian Taxation Office. However, if this refund comes from the income that you have earned before you went bankrupt, it will not be given to you directly. Instead, it will be given to your bankruptcy trustee to help pay off your debts.
Any refunds you have received on the income earned after the bankruptcy will also be claimed by the trustee and be treated as theirs—not yours. This will go on until your payments have been fulfilled. Once the debt has been cleared and you are out of bankruptcy, any refunds after that will go back to you.
3. Late lodging of tax returns
In case you were late in lodging your tax returns, it will be the bankruptcy trustee's job to ensure that everything is updated to establish the debt you are in. This is something you do not want to happen because the Australian Taxation Office will give you a default assessment if the trustee fails to do fulfil their responsibility.
This situation, more often than not, does not work in your favour. Therefore, it is in your best interests to always keep up with your tax obligations and ensure that your records are all up-to-date before such an assessment is given.
As you can see, taxes make bankruptcy even more complicated and headache-inducing than it already is. For this and other reasons, you should always stay clear from getting into too much debt.
Sure, debt is excellent if used correctly, such as borrowing money to make a substantial investment that will help you gain more finances and grow. However, do your best to keep this under control. Otherwise, you will find yourself in deep trouble, potentially bankrupting your business as you are not able to pay back what you owe.
Looking to work with business accountants to ensure you are not heading towards bankruptcy? We at New Wave will ensure you stay clear from such trouble! Reach out to us today to get started.