What is a Garnishee Notice issued by the Australian Taxation Office (ATO)?
Under section 260-5 of Schedule 1 of the TAA, the ATO can require a third party who owes money or holds money on behalf of a tax debtor to pay that money to the ATO. This means that a recipient of a garnishee notice is legally required to pay funds belonging to, or owing to a taxpayer, to the Australian Taxation Office.
The garnishee notice will usually be issued to banks or other financial institutions and can result in money held in the bank accounts of a Company being paid to the ATO.
The garnishee notice can also be issued to trade debtors or any other party who owes money to, or holds money on behalf of, the taxpayer directing those funds to be paid to the ATO.
What should I do if I receive a garnishee notice from the Australian Taxation Office (ATO)?
As soon as the ATO issue a letter advising of their intention to issue a garnishee, directors should immediately seek advice on their options.
Any plan to deal with the tax and other debts should be carefully considered to determine what can realistically be achieved.
There are various options to manage the debt such as entering a manageable payment plan. Alternatively, the Company may need to undertake a formal restructure such as a voluntary administration.
If you need further assistance formulating a plan or want to have a conversation about considering all your available options.
FAQ and Case Study
What matters does the Australian Taxation Office (ATO) consider before issuing a garnishee notice?
As outlined in PS LA 2011/8, prior to issuing a garnishee notice, the ATO will generally consider:
- The financial position of the tax debtor and steps taken to make payment in the shortest possible timeframe.
- Extent of any other debts owed by the taxpayer.
- Whether revenue is placed at risk because of action of the tax debtor such as paying other creditors in preference.
- The likely implications of issuing a notice on a tax debtor’s ability to provide for a family or to maintain the viability of a business.
The ATO recognises that issuing a garnishee notice is an exercise of coercive power and therefore is required to act with care.
In our experience, the ATO does not issue garnishee notices until they have made various attempts to liaise with the taxpayer. This may include where the ATO has sent several warning letters advising of their intention to commence recovery action.
The ATO will also issue a notice of intended garnishee signaling its intention to issue the notice shortly.
What are the consequences of receiving a Garnishee notice?
The removal of funds from a company’s account or a percentage of debtor payments being made to the ATO could be an impact of the garnishee notice being issued. This could have a serious impact on a company’s ongoing trading, including the removal of cash required for payment of wages, materials, suppliers, and ongoing business operations.
It also indicates that the ATO will now likely be more aggressive in pursuing outstanding debt, and may proceed with other recovery options, including commencing to wind up the company.
Can I request the Australian Taxation Office (ATO) to withdraw their intention to issue a garnishee notice?
The ATO will consider any reasonable requests to either withdraw or vary the requirements of the garnishee notice provided the taxpayer makes suitable alternative arrangements for payment.
The ATO may however refuse to withdraw the garnishee notice when there is a previous history of non-compliance.
Australian Taxation Office (ATO) Garnishee Notice Case Study
The below scenario is an example of where the director missed various opportunities to engage with the ATO and a restructuring specialist early. Early intervention and advice would have prevented the debts of the company from escalating and provided the director with various opportunities to address underlying issues in his business:
- Company entered multiple payment arrangements with the ATO over 2 years.
- Continued to breach payment arrangements by not reporting and paying all future liabilities.
- ATO issued various garnishee warning letters and the director, after receipt of these, would re-engage with the ATO and re-negotiate payment arrangements.
- The director stopped reporting liabilities to the ATO altogether.
- The ATO issued a further garnishee warning letter.
- Director removed money from the company account to his personal account to stop the funds from being garnished.
- The ATO commenced more aggressive collection action.
- A month later the director placed the company into Voluntary Administration.
- By this time, the director was trading whilst insolvent by failing to adhere to various payment arrangements. The amount owing to creditors and the ATO increased significantly in the 6 months leading up to the administrator’s appointment.
- The ATO criticised the director at the second meeting of creditors for not engaging with them and having a bad compliance history, voting against the proposed deed of company arrangement (“DOCA”).
- The company was placed into liquidation. The Company’s previous compliance history was a strong factor considered by the ATO in this scenario.
How are funds recovered by the Australian Taxation Office (ATO) under the garnishee notice allocated?
Generally, where the payment is made in full, the payment will be allocated to the component amounts that constitute the total payable in that notice. Part payments are allocated in accordance with the allocation rules set out in PS LA 2011/20. The order of allocation in this regard is that superannuation (SGC) debts are given the highest priority, followed by debts on the running balance account.
What not to do if you receive a Garnishee Notice from the Australian Taxation Office (ATO)?
Our office regularly sees directors attempting to avoid the consequences of garnishee notices by either transferring funds out of the company’s bank account, directing customers to pay into an account held by another entity, or opening another account for the company. This strategy will more likely than not result in the ATO escalating its collection mechanism by proceeding with wind-up action against the company.
Alternatively, directors will sometimes sell personal assets or borrow money personally to attempt to pay back the tax debt. This does not only result in the depletion of personal wealth but will not address any underlying issues in the business and the company may indeed find its tax debts escalating again after several years.
Examples of Garnishee notices issued by the Australian Taxation Office (ATO)
See below two examples of garnishee notices issued by the ATO. It is worthwhile noting that both companies failed to engage with the ATO resulting in the issuing of the garnishee notices.
The first example is a notice issued to a company attaching a garnishee notice provided to a bank. The debt outstanding was circa $300,000, with the ATO requesting that circa $100,000 or whatever amount remained in the bank was to be paid to the ATO. This could have a devastating impact on the business with money available to pay other mission critical creditors, such as employees, removed.
The second example is a notice issued to the Company attaching a garnishee notice provided to a debtor of the company. The debtor was a major construction principle with the amount subject to the garnishee in excess of $400,000. The notice required the debtor to withhold 15% of every payment made and pay this to the ATO. The issuing of the garnishee notice to a major debtor / customer of the business is problematic as it may result in the customer’s loss of confidence in the business’s ability to remain solvent and/or complete future projects. In this case, the customer stopped engaging the company to undertake any future works.
Further Australian Taxation Office (ATO) resources
ATO Website – If you don’t pay -
PS LA 2011/3 – Compromise of undisputed tax-related liabilities and other amounts payable to the Commissioner -
PS LA 2011/4 - Collection and recovery of disputed debts -
PS LA 2011/14 - General debt collection powers and principles -
PS LA 2011/16 - Insolvency - collection, recovery and enforcement issues for entities under external administration -
PS LA 2011/17 - Debt relief, waiver and non-pursuit -
PS LA 2011/18 - Enforcement measures used for collection and recovery of tax-related liabilities -
PS LA 2011/21 - Offsetting of refunds and credits against taxation and other debts -
Further Shaw Gidley Articles on Australian Taxation Office (ATO) recovery proceedings
AUSTRALIAN TAXATION OFFICE DIRECTOR PENALTY NOTICE -
AUSTRALIAN TAXATION OFFICE (ATO) WINDING UP PROCEEDINGS -
AUSTRALIAN TAXATION OFFICE (ATO) PAYMENT PLAN / ARRANGEMENT -
AUSTRALIAN TAXATION OFFICE (ATO) CREDIT REPORTING -