Denlay v Commissioner of Taxation (2013) FCA 307 saw a long speculated question put to a test, which is conceivably one of many to come.
The Australian Taxation Office (ATO) holds many powers to recoup what’s owed to them. One of which is the power to ‘garnishee’ the tax debtor’s bank accounts, some trust funds, property sale proceeds, company shares and trade debtors. The question has long lingered about whether superannuation funds were, practically speaking, also part of the list.
The mechanism behind a garnishee notice is a simple process of an entity receiving a notice demanding monies held on behalf of a tax debtor, which is expressly to be taken as being authorised by the debtor and/or any other persons also entitled to all or part of the funds. This third party is compelled to make the payment directly to the ATO and is indemnified in doing so.
Superannuation funds by nature are supposed to be a protected source of money and so it has been said that a garnishee order would not be effective until the tax debtor’s (member’s) benefits are payable under the rules of the fund – which is usually when the member retires or dies! In the event of bankruptcy superannuation monies are excluded from the definition of divisible property and therefore cannot be realised by a bankruptcy trustee for the benefit of creditors.
In the case of Denlay v Commissioner of Taxation a garnishee was issued over the taxpayers’ superannuation fund. Interestingly, at the time of the issuing of the garnishee the parties were part way through the hearing of appeals filed by the Denlays to amended income tax assessments made by the ATO, and at a time when the ATO had consented to an order for a stay of the enforcement of a judgment in relation to the tax debt.
Mr & Mrs Denlay was declared bankrupt in 2012 upon lodging debtor’s petitions, Jason Bettles, Partner Worrells Gold Coast is the bankruptcy trustee of both estates. Mr Denlay was not in a position to pay the tax debt or further fund the appeal of the assessment.
Early this year the Denlays filed an application in the Federal Court seeking a judicial review of the Commissioner’s decision to issue the garnishee notice, particularly given the stay on the enforcement of the judgment. The court accepted the Denlay’s argument and quashed the garnishee notice ordering that the monies be refunded to the superannuation fund, and interestingly awarded costs in favour of the Denlays on an indemnity basis.
What is important to note is that the garnishee was quashed essentially because it was inappropriate issue such a notice at the time of a court ordered stay on enforcement proceedings, not because superannuation monies are generally believed to have some sort of protection.