It is not uncommon for Worrells partners acting as trustees of bankrupt estates to find that a bankrupt has not lodged returns a number of years prior to the start of the bankruptcy.
If only one or two years of returns are outstanding then no great issue arises because there is often a correlation between the trading losses which lead to the bankruptcy, and the taxable income of the bankrupt. In other words, it is unlikely that any tax would be payable by the bankrupt for those years.
As a matter of course the Australian Taxation 0ffice is invited to lodge a claim in every bankruptcy. In a recent case the Tax Office replied to this invitation stating in effect that “presently there is no amount owing but that position might change when the outstanding returns for the last eight years are lodged”. The purpose of this article is not to examine why or how the bankrupt was allowed not to lodge returns for eight years, rather we examine what impact this has on the bankrupt estate.
Firstly we make the point that the trustee is under no obligation to lodge returns on behalf of the bankrupt. Indeed the trustee is very unlikely to have the records or other knowledge required to complete the outstanding returns. On the other hand the trustee will gladly make available all records that he holds so that the Taxation Office can, if it wishes, make default assessments.
Further it is no part of the trustee’s duty to estimate any tax liability, nor should he or she delay the payment of a dividend in order that the taxpayer can arrange the lodgment of returns or to allow the Taxation Office to make assessments whether on the basis of returns lodged or by default.
In practical terms the trustee is likely to delay the payment of a dividend for a short period if he or she is satisfied that the Australian Taxation Office will be in a position to lodge a proof of debt within, say, a few weeks.
The trustee will always give the Taxation Office notice of any dividend which is to be paid and it is the Taxation Office responsibility to lodge a proof claiming any tax which it assesses is due. In the event that no proof of debt is received from the Taxation Office within the notice period, the Taxation Office will be excluded from the dividend.
It should be noted that I.T.S.A acting as regulator has specifically stated “trustees should not unnecessarily delay the administration of an estate, including distribution of funds, or adding to costs of the administration with respect to the bankrupt bringing their taxation affairs into order”.
In circumstances where the payment of the dividend leads to an annulment of the bankruptcy, and outstanding tax returns are subsequently lodged giving rise to a tax bill, the Taxation Office will be able to make a claim on the ex bankrupt provided that it did not lodge a claim in the bankrupt estate.