The question about the level of obligation placed on bankruptcy trustees to have outstanding tax returns filed has been discussed in an article in the latest ITSA newsletter – “Personal Insolvency Regulator”. This discussion looks at the obligation from the point of view of a pending annulment of bankruptcy under section 153A – being the payment of all debts in full.
We have reproduced that article here as it explained ITSA’s position on this matter.
ITSA Regulation has identified an issue of concern in relation to annulments and the treatment of claims or possible claims by the Australian Tax Office (ATO). In a typical scenario once the ATO has been notified of the bankruptcy, they will ordinarily do one of two things:
lodge a claim for income tax or GST in relation to financial years and/or GST periods where the bankrupt has filed his/her tax returns or business activity statements, and if there are unfiled income tax returns or business activity statements (BASs) state in a covering letter that a further proof of debt may be lodged when the liability, if any, in respect of a certain period is ascertained which relates to various unfiled income tax returns and BASs.
If there is no liability the ATO will advise that they do not presently have a claim however a proof of debt may be lodged when the liability, if any, in respect of a certain period is ascertained, which relates to various unfiled income tax returns and business activity statements.
At this point in the administration, some trustees will treat the bankrupt’s bringing his/her tax affairs up to date to be a condition of the annulment, so they can quantify the ATO’s claim. In some cases this will prolong the administration of the estate and substantially increase the costs to the estate, which in turn has the affect of reducing the surplus paid to the bankrupt.
The section relevant to annulments on payment of debts is 153A. For an annulment to take effect the trustee must be satisfied that all the bankrupt’s debts have been paid in full. A bankrupt’s debts are defined as those debts which have been proved in the bankruptcy. Pursuant to section 84(1), a creditor who desires to prove a debt in a bankruptcy shall lodge, or cause to be lodged, with the trustee a proof of debt. Therefore, if a creditor wishes to prove their debt in the estate, once they are aware of the bankruptcy, the onus is on them to lodge a proof of debt. Once the ATO has lodged a claim in the estate, the trustee’s sole duty is to adjudicate on it pursuant to section 102. Due to the nature of self-assessment in the Australian taxation system, it is not necessary or appropriate for trustees to proactively pursue the bankrupt to ensure that s/he bring their tax affairs up to date for trustees to be satisfied that all their debts have been paid pursuant to subsection 153A(1).
The bankrupt’s liability to the ATO is created once the income tax returns or BASs have been filed. If after the annulment occurs, the bankrupt brings their tax affairs up to date, the annulment will not affect the ATO’s right to pursue their claim.
While section 260-45 of the Schedule 1 of the Tax Administration Act 1953 places certain obligations on company liquidators in relation to the company’s tax liability and the distribution of the company’s assets, there are no equivalent provisions for administrations conducted pursuant to the Bankruptcy Act 1966. Clause 2.13 in Division 2.4 of Schedule 4A Performance Standard for Trustees requires trustees to incur only those costs which are necessary and reasonable. For the reasons outlined, it is not considered that the time spent in pursuing the bankrupt in order for him/her to bring their tax affairs up to date to be necessary or reasonable. Obviously there is some opportunity for the trustee to make limited enquiries with the ATO and with the bankrupt about the advantages of the ATO making a full and final claim in the estate, and for the bankrupt to bring their tax affairs up to date, but if either party is not willing to facilitate this, the trustee should proceed with the annulment.
Inspector Regulation Central Region
Regulation and Enforcement
Essentially the responsibility to lodge a proof of debt in these circumstances rest with the ATO and, as there is no release from debt because there is no discharge from bankruptcy, the ATO will not be disadvantaged if they do not do so before the annulment is processed.
The position may be different if an annulment is sought through a proposal under section 73 of the Act, or bankruptcy is avoided under Part X of the Act. In these cases the ATO may insist that the filing of all outstanding returns be a term of the arrangement for them to vote in favour of it.
This also clarifies the general position that it is the creditor’s responsibility to lodge a proof of debt in any estate. The trustee – or liquidator etc in corporate appointments – is not obligated to chase creditors for proofs of debt when dividends are being declared.