PROVABLE DEBTS IN BANKRUPTCY - WHY IS THE ATO ABLE TO OFFSET A TAX REFUND POST BANKRUPTCY?
01 06 2006
On the bankruptcy of an individual one of the general intentions of the Bankruptcy Act 1966 is to free an insolvent person from his or her financial obligations arising from debts incurred prior to bankruptcy that they are unable to meet. Generally a creditor with a provable debt is prevented from continuing any recovery proceeding against a debtor upon their bankruptcy. There are very limited exceptions.
Debts owed to the ATO are provable so why is the ATO able to apply a credit against a debt that is provable in the bankruptcy? The ATO relies on Section 8AAZL of the Taxation Administration Act 1953 which allows the Commissioner to apply the credit entitlement in reduction of an amount due under a taxation law. Why should the ATO be in a better position then any other unsecured creditor in the bankruptcy? The ATO relies on the Full Federal Court decision in Taylor v DFC of T 87 ATC 4441 to allow the Commissioner to apply post bankruptcy credits against pre bankruptcy debts until:
- the tax liability is extinguished; or
- the bankrupt is discharged.
In that case the Court held that although a liability was provable under bankruptcy law, the process of dealing with the credit as provided for in the taxation law worked independent of the operation of the bankruptcy law.
If post bankruptcy credits can only be offset against pre bankruptcy debts by the ATO up to the date of discharge (normally a three year period) then a bankrupt due a refund but who only lodges the return post discharge would, based on the ATO’s position above, seemingly be entitled to retain the credit.