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Insolvency occurs when you find yourself in a position where you cannot pay your debts as they become due. There are several options available to you. Although they are administered by the Insolvency and Trustee Service, some options have income tax implications as well.
This is a formal arrangement with creditors for people who owe less than $47,000 in unsecured debt (excluding student loans, fines, criminal reparations and child support). The Official Assignee may make an SIO on your application or on the application of a creditor (with your consent). Provided you are able to make regular payments to satisfy all or part of your debts in the SIO, creditors are prevented from taking further action to recover their debts and will not be able to add any further interest or charges to your debt. An SIO can be in place for up to 5 years.
There are no tax implications to entering into a SIO except that we may write off some or all of your tax debt at the direction of the Official Assignee.
A no asset procedure (NAP) is available if you owe between $1,000 and $47,000 in both unsecured and secured debt and have no assets or income that would enable you to repay part or all of your debts. You continue to remain responsible for some debt including student loans, fines, maintenance, debts based on fraud, child support payments and some WINZ debt. A NAP lasts for 1 year.
There are no tax implications to entering into a NAP. At the date you are discharged from the NAP the Official Assignee will advise us if you have met the criteria and we will write off any outstanding tax debts except those incurred due to fraudulent activity, child support and student loans.
Bankruptcy is a legal proceeding where people who cannot pay their bills can get a fresh financial start. Filing for bankruptcy immediately stops your creditors from seeking to collect debts from you. With the exception of child support, all money owed to Inland Revenue at the date of bankruptcy, including student loan amounts, will form part of our claim. We will write off any amount that cannot be recovered due to bankruptcy. The period of bankruptcy normally lasts for three years but this may be extended
Tax implications of bankruptcy
Your IRD number
You will have a new IRD number from the date of your bankruptcy. This is so we can keep your pre and post-bankruptcy tax account details separate. You do not need to apply for your new IRD number; we will do this for you.
You will need to give your new IRD number to all parties who currently hold your pre-bankruptcy IRD number, for example, employers, banks, and Work and Income (including its StudyLink service for subsequent student loans drawn).
If you have a student loan at the date of bankruptcy you are no longer required to repay it so you should change your tax code with your employer so that they stop making student loan deductions from your salary. If any repayment deductions are made after the date you are adjudicated bankrupt this will become an asset in your estate and will be sent to the Official Assignee.
Your tax refunds
In the tax year when you are adjudicated bankrupt, any refund attributable to the period from:
- 1 April to the date of adjudication is off-set against outstanding taxes (if any). If there is still a balance of a refund post-offset then it is payable to the Official Assignee
- the date of adjudication to the next 31 March is payable to the Official Assignee.
In tax years when you are an undischarged bankrupt from 1 April to the next 31 March any refund due is paid to the Official Assignee.
In the tax year when you are discharged from bankruptcy, any refund attributable to the period from:
- 1 April to the date of discharge is payable to the Official Assignee
- the date of discharge to the next 31 March is payable to you unless you have outstanding child support debt. If you have outstanding child support debt the Commissioner may apply the refund towards that debt.
Any balance of a refund would be payable to you.
You are still entitled to receive Working for Families Tax Credits, Paid Parental Leave payments and Child Support payments for the period of your bankruptcy. These will be paid under your new IRD number.
Consent to trade
While you are bankrupt you must obtain the consent of the Official Assignee to be self-employed (this includes contracting or operating any form of business where you are directly responsible for payment of tax, or employ another person)
When the Official Assignee has given you consent to trade they will send us a copy of the document. If we have not received this document we will not allow you to register a bank account for GST and any GST refunds will be sent to the Official Assignee.
If you have losses to carry forward prior to your bankruptcy you can carry them over to your new IRD number provided all the returns are filed up to the date of bankruptcy. Once your returns are filed for the year of adjudication we will let you know the amount of loss you can carry forward.
If you still have available losses to carry forward at the date that you are discharged from bankruptcy two adjustments may need to be made to reduce the losses available to be offset.
The first adjustment will occur if you have had tax written off as a result of your bankruptcy. The amount of the loss available to be carried forward will be reduced as per Section 177C(5) of the Tax Administration Act 1994.This adjustment will be made by the Commissioner and you will be notified of the amended amount of the losses available to be carried forward.
The second adjustment will need to be made if any debts written off under the Insolvency Act 2006 related to expenses claimed against your income in earlier years. An amount must be added back as remitted income under section CG 2B of the Income Tax Act 2007. The amount to be added back is limited to the lesser of:
- the amount of the debts relating to expenses claimed in earlier years, or
- the amount of the losses available to carry forward at the beginning of the year in which you are discharged from bankruptcy less any reduction arising through section 177C(5) of the TAA.
This adjustment needs to be made by you in the return of income for the year in which you are discharged from bankruptcy and full details of your calculations should be filed with your return. You may need at the time to seek the assistance of your tax advisors in this matter.
We work closely with the Official Assignee and are legally obliged to give them any information they request regarding your financial affairs. This includes (but is not limited to) your employment, income and contact details.
Filing tax returns
In the year that you were adjudicated bankrupt you are unable to receive a personal tax summary (PTS) under either IRD number. If you are required to file or wish to file for this period you must file two part-year IR3s:
- one return under the original IRD number from 1 April to the date of adjudication showing all income and claiming any expenses they may be entitled to for this period . If you have a standard balance date this will be from the 1st April to the date you were adjudicated bankrupt, and
- another return under the new IRD number showing all income and claiming any expenses you may be entitled to for the period from the day after the date you were adjudicated bankrupt to the end of the income year. If you have a standard balance date this will be from the day after you were adjudicated bankrupt to the 31st March.
We'll do a special assessment for these returns to calculate the correct tax for the whole year.
If you are normally required to have a personal tax summary then you will continue to be issued these after the year in which you were adjudicated bankrupt.
Child support assessments
All liable persons who are declared bankrupt during the previous financial year are assessed under the normal assessment rules.
For more help
If you need more information please call us on 0800 377 774.