Section 260–5 of Schedule 1 of the Taxation Administration Act 1953 allows the Australian Taxation Office (“ATO”) to issue a notice (garnishee notice) to a third party person or company that holds money or may hold money for you or your company in the future.
These third parties can include:
- An employer
- Debtors of a business
- Banks and other financial institutions
- A purchaser of a asset including property
The garnishee notice has the effect of requiring the third party to pay monies to the ATO in reduction of the outstanding liability.
The payment demand may include a percentage or a lump sum amount and will provide specific payment instructions including the date/s on which payments are to be made.
Failure of the third party to comply with the garnishee notice can result in the ATO taking action against the third party. Such action can include an order that the third party pay the amount sought by the Garnishee Notice.
The Garnishee Notice creates a statutory charge over the monies held by the third party to the ATO to the extent of the ATO debt. The charge created does not rank ahead of an existing fixed charge nor does it require registration on the PPSR.
The garnishee notice is one of many tools the ATO has at its disposal to recover monies in conjunction with, statutory demands and director penalty notices issued by the ATO. These notices can have a dramatic effect on the cash flow of a company and ultimately its ongoing viability.
Examples of entities that the ATO has issued garnishee notices against include:
Banks – requiring payment of the entire tax debt or 30% of the current balance whichever is the lesser sum. (If your account is in overdraft there is no requirement for the bank to pay)
Purchasers – of assets meaning that the company does not receive the funds due at settlement or in the case where a secured creditor is involved the sale falls through as the secured creditor will not release security without payment and the secured creditor is unable to receive the payment by operation of the garnishee.
Debtors – including factoring companies (operates similar to a bank). Despite the charge of the factoring company surpluses normally available to the company may become payable to the ATO.
Solicitor – In respect of funds received in trust held on behalf of the company in respect of the deposit monies from the sale of a property.
Accountant – In respect of trust monies to be held on behalf of the company paid into the accountants trust account from estate monies.
When can the ATO issue a garnishee notice and what to do?
Garnishee notices rarely come “out of the blue”.
It is usually following a period of non payment, failed repayment arrangements or poor compliance. For companies, the ATO will in the first instance issue a ‘Notice of Intended Legal Action/Garnishee Notice’ to the company signalling its intentions to escalate its recovery action. Accordingly you should be taking action prior to receiving such notice or at the least upon receiving the Notice of Intended Legal Action/ Garnishee Notice.
You should remain mindful that the ATO can issue a garnishee notice at any time. In many instances the bank account has already been garnisheed before the formal notification is received by the debtor or company.
However if the ATO has issued a garnishee notice and recovered funds that impacts your cash flow and viability it is vital that you seek professional assistance forthwith either from your accountant or from one of our insolvency and business advisory expert directors, who will be able to assist you in undertaking an immediate viability assessment of your business and make the appropriate recommendations.
Can the ATO continue to issue a garnishee notice if the company is in external administration?
A recent Federal Court decision (Bell Group Limited (in liq) v DCT  FCA 1056) has held that the ATO cannot issue a garnishee notice in respect of pre or post liquidation liabilities after the commencement of the winding up, upholding earlier findings in the case of Bruton Holdings Pty Ltd (in liq) v FCT  HCA 32; (2009) 239 CLR 346.