Insolvency is often a scary and confusing process for your Clients and their loved ones. Below are some practical issues and implications, to assist you and your Clients.
Fact 1 – All Bankruptcies are NOT 3 Years
The period of bankruptcy is 3 years (plus 1 day) from the time a Bankrupt files a Bankruptcy Form (formerly called a Statement of Affairs) with the Australian Financial Security Authority (AFSA), the Federal Government Agency that regulates personal insolvencies.
As a result, the period of a bankruptcy depends on when a Bankruptcy Form is lodged with AFSA.
- For a voluntary bankruptcy (Debtor’s Petition), the bankruptcy period is 3 years and 1 day from the date of bankruptcy, as a Bankruptcy Form needs to be lodged to start the bankruptcy.
- For a bankruptcy initiated by a Creditor through the Court (a Sequestration Order), a Bankrupt will not usually file a Bankruptcy Form on day 1 of the bankruptcy, therefore the bankruptcy will end 3 years and 1 day after that document is filed with AFSA. For example, if the Bankruptcy Form is lodged 3 months after the bankruptcy, the bankruptcy period will run for 3 years, 3 months and 1 day.
- If a Bankrupt never lodges a Bankruptcy Form, the bankruptcy will continue forever!
- A bankruptcy can be extended by the Bankruptcy Trustee lodging an Objection to Discharge with AFSA. An objection is typically lodged due to a Bankrupt not complying with their obligations. The bankruptcy can be extended by an additional 2 or 5 years, depending upon the grounds of the objection (or longer if in relation to a Bankrupt not returning to Australia when required). A Bankrupt has a right of appeal, and an objection can be cancelled or withdrawn by the Trustee or AFSA.
It is therefore important for Bankrupts to lodge a Bankruptcy Form. Some of the consequences of a prolonged bankruptcy are:
- If a Bankrupt acquires assets during the bankruptcy, they can lose them as they vest in the Bankruptcy Trustee to deal with (known as after-acquired property).
- If a Bankrupt is a beneficiary of a deceased estate, the interest bequeathed to the Bankrupt can also form part of the bankruptcy.
- If the Bankrupt’s income increases, they can be liable to pay income contributions.
- It can impact a Bankrupt’s ability to obtain finance.
The Federal Government is also considering (again) implementing a 1-year bankruptcy. We will provide updates on any developments.
Fact 2 – Directors are NOT Automatically Liable for Company ATO and Superannuation Debts
We see a lot of confusion from Company Directors (and sometimes Advisors) regarding a Director’s potential liability for a Company’s unpaid tax and superannuation liabilities.
Directors are not automatically liable to pay unpaid tax debts and superannuation for a Company.
A Director only becomes liable to pay unpaid GST (including luxury car tax and wine equalisation tax), PAYG and superannuation under the Director Penalty Notice (DPN) legislation.
Below are links to previous articles and the ATO website regarding DPNs.
If a Company does not pay these amounts by the due date, a Director can avoid automatic personal liability by ensuring the BAS and/or superannuation guarantee charge statement (SGCS) are lodged with the ATO within the required timeframe. If the lodgements are done within the required timeframe, the ATO can still issue a DPN to the Director (by sending it to the Director’s address as per ASIC’s records) to pursue the personal liability. In this case, the Director has options to avoid being personally liable (the debt is paid or entering into an insolvency arrangement prior to the DPN deadline).
If a Company does not pay the GST, PAYG and/or superannuation AND does not lodge a BAS and/or SGCS by the required dates, the Director/s automatically become liable to pay the amounts owed by the Company. Personal liability can only be avoided by the debts being paid.
Therefore, it is important that your Clients:
- lodge a BAS and/or SGCS if it cannot pay its GST, PAYG and superannuation on time; and
- ensure their contact details with ASIC are accurate.
If you or your client require specialist insolvency advice, SV Partners can assist. Contact our team on 1800 246 801 today.
Article written by Jason Cronan (Director) – SV Partners Sunshine Coast