We often see that when individuals or corporations are in financial difficulty they start to default in the payment of their tax obligations such as GST and PAYG withholding tax. If a debtor fails to address payment of its taxes and does not enter into a payment arrangement with the ATO, the ATO will inevitably seek to recover the outstanding tax debt.
The ATO are like any other creditor in that, if the debt remains outstanding, they can pursue recovery through legal action and as a final sanction may seek the bankruptcy of an individual debtor or the liquidation of a corporate debtor.
However, the ATO has additional statutory powers for the recovery of debts which it can (and does) use prior to bankruptcy or liquidation proceedings. One of these recovery powers is the issuing of Statutory Garnishees.
Where a person (third party) owes money to or holds money for a tax debtor, section 260-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) empowers the ATO to require the third party to pay that money to the ATO 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 ATO under subsection 260-5(2) of Schedule 1 to the TAA is referred to as a 'Garnishee Notice'. When a Garnishee Notice is issued by the ATO, a copy of the Notice is sent to the tax debtor.
Any third party who receives a Garnishee Notice and pays money to the ATO as required by the Notice is taken to have been authorised by the debtor or any other person who is entitled to all or part of that amount. The third party is indemnified for any money paid to the ATO.
Whilst it is legally possible for the ATO to issue a Garnishee Notice to any third party that owes money to or holds money for a tax debtor, the ATO must be in a position to identify parties upon which to issue such a Notice. Accordingly, it is not surprising that the majority of Garnishee Notices that we see are issued to banks and financial institutions as these entities are more readily identifiable as potentially holding funds on behalf of a tax debtor.
Unfortunately for the ATO, a Notice issued to a bank or financial institution will have little or no success if there are no funds or minimal funds available in the debtor’s bank account or there is an overdraft account in place.
It is however interesting to note that the ATO's garnishee powers can be used to require a financial institution to pay amounts to the ATO which are transacted through a business’s merchant card facility before the amounts are deposited into the business’s bank account.
Other examples of third parties upon which the ATO may also issue Garnishee Notices are:
An employer or contractor (for an individual debtor) in respect of salary or wages.
The ATO’s policy is that they will usually seek to garnishee no more than 30 cents in the dollar of the amount of salary and wages payable to a tax debtor.
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 Garnishee Notice may be served on a superannuation fund however it would not be effective until the tax debtor's (member's) benefits are payable under the rules of the fund (usually when the member retires or dies).
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.
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 debtor and the tax debtor 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.
With the introduction of the Personal Property Securities Act, 2009 in October this year, it will be interesting to see whether Garnishee Notices may require registration on the PPS register in order to be enforceable (they probably will) and how the ATO will achieve this.