Australia: How ATO garnishee notices work

Routine debt collection practice under scrutiny.

A Four Corners and Fairfax investigation has thrown the Australian Taxation Office's (ATO) current approach to a routine debt collection practice under immense scrutiny.

The ATO has long held the power to recover its debt through third parties of an entity with an outstanding tax debt. The mechanism used to enforce this right is a garnishee notice. According to Smart Company, a whistle-blower was reported to say that staff at the ATO were told "to start issuing standard garnishee notices on every case". The article goes on to say that the ATO denied this position in a statement; outlining that "it only issued 14,000 garnishee notices for small businesses in the past financial year, accounting for 0.5% of 'collectable debt cases'."

The Minister for Revenue and Financial Services, Kelly O'Dwyer, called for an investigation into Four Corners and Fairfax investigation's claims.

This article explains how ATO garnishee notices work in practice.

Section 260-5 in schedule 1 of the Taxation Administration Act 1953 (TAA) provides the ATO with the power to recover tax related liabilities and certain other debts payable to the Commonwealth from third parties owing money to, or holding money for, a tax debtor. The Commissioner's practice statement PSLA 2011/18 at paragraph 98 states:

"Where a person (third party) owes money to or holds money for a tax debtor, section 260-5 of Schedule 1 to the TAA empowers the Commissioner to require the third party to pay that money to the Commissioner rather than paying it to, or continuing to hold it for, the tax debtor. This power is commonly referred to as a 'garnishee power' and a written notice issued by the Commissioner under subsection 260-5(2) of Schedule 1 to the TAA is referred to as a 'garnishee notice'."

The Commissioner goes on to state at paragraph 118:

"A garnishee notice in respect of any tax-related liabilities may be served on a superannuation fund but it will not be effective until the tax debtor's (member's) benefits are payable under the rules of the fund (for example, the tax debtor retires or dies). A notice served on the fund will generally request payment as a lump sum unless the anticipated retirement income stream can guarantee repayment within a satisfactory period of time."

Case law
Two cases are particularly relevant to show how far the ATO's garnishee power can extend, in respect to the following:

  1. monies not yet due
  2. Self-managed superannuation funds (SMSF).

Monies not yet due
In Dinning v FCT 1999 42 ATR 299 the ATO issued garnishee notices on an employer and for future salary payments. The Court upheld the garnishee notice in that case, so there is no reason to suspect that a garnishee notice on super monies due in the future won't be valid.

In Denlay & Anor v FCT 2013 ATC 20-382 the ATO issued a garnishee notice relating to monies being paid to the Denlays from their superannuation fund. And in Can Barz Pty Ltd & Anor v Commissioner of State Revenue & Ors [2016] QSC 59 a garnishee notice issued by the Office of State Revenue was held not to apply to monies held by the taxpayer on trust for a self-managed superannuation fund.

Garnishee notices can also apply to the following third-party scenarios:

  • A purchaser of land or property from a tax debtor.
  • Solicitors holding trust funds.
  • A company in which a tax debtor holds shares.
  • Trade debtors.

A purchaser of land or property from a tax debtor
Where such land or property is mortgaged, the garnishee notice will also attach to the amount required to pay out the mortgage. As a sale would be unlikely to proceed if a vendor is unable to payout the mortgage and provide a purchaser with clear title to the property, the ATO's policy is that they may require that the notice only applies to the part of the purchase price to be paid to the vendor after the mortgage has been discharged.

Solicitors holding trust funds
A garnishee notice may be served on a solicitor (or solicitors) holding trust funds on behalf of a client however, the notice may not be effective if all such funds have become charged by a lien in respect of costs due from the tax debtor to such solicitors.

A company in which a tax debtor holds shares
This would entitle the ATO to receive any dividends payable to the debtor in respect of such shares.

Trade debtors
A garnishee notice may be served on a trade debtor or debtors of an individual or company.

If a garnishee notice is issued in respect of a tax debt and the tax payer subsequently enters some form of insolvency, the ATO will not ordinarily withdraw the notice and it will continue to be effective against an insolvency practitioner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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