Mid-last year, the Commissioner of Taxation, Michael D'Ascenzo, gave a speech indicating that the Australian Taxation Office would be taking "firmer action" with businesses who are unwilling to work with the ATO, or who are unable to meet outstanding tax debts. He said that this would include recovery actions such as garnishees, director penalties, statutory demands and wind-ups or bankruptcies.
Accountants are now reporting a sharp increase in the number of garnishee notices being issued to business bank accounts. It seems that it's not just small and medium businesses who are "unwilling to cooperate" or are unable to pay escalating debts. Many taxpayers who have entered into repayment plans have been targeted, receiving garnishee notices if they miss even one repayment. What's more, businesses are, in some cases, not being issued with a copy of the garnishee notice and only finding out about it when their direct debits or cheques are declined.
Here, Special Counsel Damian O'Connor and Solicitor Helen Davison outline how garnishee notices work, and why it's important that businesses are aware of this powerful weapon in the ATO's arsenal.
How garnishee notices work
A garnishee notice is a notice issued by the Tax Commissioner to a third party, such as a bank, compelling it to pay funds held on a taxpayer's behalf to the ATO to recover a tax debt.
The Commissioner can issue a garnishee notice whenever a taxpayer owes a tax debt. However, he can also issue a notice where:
- your tax has not yet become due;
- you have entered into a repayment arrangement;
- you are negotiating with the ATO; or
- you have outstanding director's penalty liabilities.
Garnishee notices can be issued to:
- any bank account in your name (your bank must search for all accounts in your name). Further, if you have an investment account that has not matured, the garnishee notice will remain in place until maturity;
- debtors who owe or may later owe you money;
- your superannuation fund, although it will not be effective until the benefit is payable;
- life insurance policies, although it will not be effective until monies become payable;
- a company in which you hold shares (your dividends could be targeted);
- your solicitor, for money held in a trust account on your behalf;
- be applied to sale proceeds (garnishee notices can take priority over mortgages where you have taken out the mortgage to defeat the notice); and
- a third party, for money paid before you received the notice.
Know your rights
The Commissioner should not issue notices:
- to joint bank accounts (even when both account holders owe a tax debt);
- to the Official Trustee;
- if the notice will deprive you of virtually all your income; or
- if your business is being wound up.
Garnishee notices can have severe implications for both businesses and individuals. For example, if a garnishee notice has been issued for sale proceeds, you may be in breach of contract if you have entered into a contract that is dependent on those proceeds.
While the ATO has extensive powers, its officers may be willing to negotiate suitable outcomes if you have tax liabilities. Further, even if the ATO does take a hard line, its actions can often be challenged successfully. A good example is Bruton Holdings Pty Ltd (in liquidation) v Commissioner of Taxation, where the High Court held that a garnishee notice issued after a business had being placed into liquidation was void.
For more information about garnishee notices or advice on your dealings with the ATO, please contact HopgoodGanim's Taxation and Revenue practice.