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How Insolvency Works on Your Taxes

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Insolvency is when a business or individual’s liabilities total more than the value of the assets and the debts can no longer be paid. If you or your company is facing insolvency, here are some general scenarios on how insolvency will affect your taxes.

How do I find out if my company is insolvent?

A company becomes insolvent when it can no longer make its debt payments on time. It also can no longer raise equity cash or loan capital cash to pay its due debts.

Another sign of insolvency is If the current or short-term liabilities are more than the current assets of the company, or when a company’s net assets are negative.

So, how does insolvency work on your taxes?

Selling your assets

If you need to sell your assets in order to pay your debts, the earnings would still be subject to tax as ordinary income or as capital gains as usual.

In few instances, insolvent companies who have to sell their trading stock or other assets below market value will be taxed at market value anyway regardless of how much was received.

If you are a sole trader or a shareholder in a company that is being dissolved and you sell the assets or the shares, you would still be subject to sales tax. However, you can also be entitled to a variety of tax exemptions and concessions under the small business Capital Gains Tax concession rules where 100% of your capital gain could be tax-free.

In addition, should a creditor or a lender choose to release your business from paying some or all of your debt, the forgiven amount would not be assessable income. Therefore, the forgiven amount may not have any tax consequence.

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Tax refunds

Should you or your company face bankruptcy, the Australian Taxation Office (ATO) may retain any tax refund that you’re entitled to. The ATO will use your tax refund to offset any pre-bankruptcy income debt as well as any of your Family Assistance or Child Support debts.

However, once the bankruptcy is discharged, the ATO can no longer keep any tax refunds to pay for the debt owed during the insolvency phase.


This is just a general guide for you to see how insolvency works on your taxes. If you need professional advice for a particular insolvency situation, contact our Insolvency & Restructuring team today.

If you need assistance with insolvency, contact a Chan & Naylor accountant near you, and we’ll be more than happy to help.

Aside from reconstruction recovery and insolvency, have a look at our other accounting and advisory services that we do to help you achieve greater success.

If you liked our “How Insolvency Works on Your Taxess” post, subscribe to our newsletter and stay in touch with us on Facebook, Instagram, and Twitter.

Chan & Naylor Group has nationwide offices in North Sydney, South West Sydney, Sydney, Pymble and Parramatta in New South Wales, Melbourne, Moonee Ponds and Hawthorn in Victoria, Brisbane and Capalaba in Queensland, and East Perth in Western Australia that can assist you with insolvency as well as any property tax or business tax enquiry that you may have. Contact us today.

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