As insolvency practitioners we see a lot of different creditor’s debt collection techniques. The Australian Taxation Office (ATO) is one of the most common creditors in estates. It uses Director Penalty Notices to make directors of companies either cause the company to pay the outstanding tax or take one of four proactive steps to avoid personal liability for those tax debts. These steps are generally well known – and are the subject of previous articles.
The ATO also has had another debt collection technique which, it appears, has been used more often over the past few months – certainly we have noticed it being used more in the recent past as debtors come to us seeking advice on their financial problems.
The technique is the use of notices issued under section 260-5 of Schedule 1 of the Taxation Administration Act 1953 (260-5 Notices). Until 1 July 2000 these notices were issued under section 218 of the ITAA and were usually known as 218 Notices. These are essentially garnishee notices. They are not served on the taxpayer, they are served on a ‘person’ who owes the taxpayer money now, or will owe it at some time in the future. The notice requires the person to pay to the ATO the amount stated in the notice when it becomes due to the taxpayer.
260-5(2) The Commissioner may give a written notice to an entity (the third party ) under this section if the third party owes or may later owe money to the debtor.
260-5 Notices have two quirks:
1. The issuance of the notices are not transactions that involve the individual or corporate taxpayer. They are served on third parties. Hence they cannot be found to be preferential or uncommercial and cannot be voided by the usual ‘void transaction’ provisions of the Corporations Act or Bankruptcy Act.
2. The notice creates a statutory ‘security’ over the money when it is served, and this charge is enforceable against any trustee or liquidator. Liquidators are not able to void the charge for want of registration as the charge created by the notice does not require registration under section 262(2) of the Corporations Act. [Goodin & Anor v FC of T & Anor (2002) 20 ACLC]
When the notice is served before any insolvency administration, they are not invalidated by any subsequent action by the taxpayer. Lodging a debtor’s petition or appointing liquidators etc will not affect them. We have not noticed any of these charges being served after the appointment or trustees or liquidators, but we are not aware of obvious restriction to them being used at that time.
Persons owing money to a taxpayer and being served with a 260-5 notice should comply with the notice – there are penalties if they do not. Trustees and liquidators etc will also have to accept that these create a security that will survive all of the usual provisions that are used to attack securities. Effectively these notices allow the ATO to get preferential treatment over other creditors.