Bringing back the heavy artillery to recover tax debt.
Over the last few weeks, we’ve seen a seismic shift from the Australian Taxation Office’s (ATO) approach of “How can we help”, to a more aggressive approach to debt collection. We have never seen the ATO send letters to notify directors of impending director penalty notices (DPNs) before, but reportedly some 50,000 letters were sent in April 2022. However, we have seen firsthand the ATO following through on its threat and actually issuing the DPNs.
Another recovery tool in the ATO armoury is garnishee notices, where the ATO can garnishee taxpayers bank accounts, debtors, and other amounts owing to taxpayers. It’s been a long time since we’ve seen these powerful weapons used, basically before COVID began, which for many of us seems like an eternity ago.
Garnishee notices can stop a company from trading in its tracks. Many years ago, we were appointed to a newsagency that was heavily geared as the company borrowed almost the entire purchase price. The director, some could argue, used the ATO as effectively a line of credit—racking up tax debt while paying down the interest-bearing secured debt to the bank. At some point the ATO tried to collect the debt through its initial recovery pathways, and ultimately issued garnishee notices on the company’s banker and some trade debtors.
How did the ATO know who to issue the garnishee notices on, you might ask?
The ATO sourced the debtors list from the director who gave the ATO this information to support his proposed payment arrangement over an extended period. Suffice to say the garnishee notices’ effect dried up the company’s cash flow, ultimately the company could not pay its trade creditors and suppliers, who then placed the newsagency on cash on delivery (COD) terms. It made it untenable for the company to continue and forced the director to sell the business—and sell it fast. This plummeted the business’s value, and created a significant shortfall to creditors, hence the need to liquidate the company.
We understand anecdotally from discussions with our bankers that very few garnishee notices are being issued currently. We do wonder how long until the ATO will blow the dust off this powerful tool given the DPN regime is being utilised.
Regardless of which artillery the ATO deems appropriate to apply, clients must be aware that if the ATO needs to go to such an extent of using garnishee notices—and we expect them very much to be used as a last resort—garnishee notices can stop their business in its tracks.
The teams at Worrells are here to help. We talk to businesses and individuals every day as complimentary to assess financial challenges and to empower clarity and options to move out of the mess of stress.
ATO garnishee notices: a compelling tool in tax debt recovery
Director penalty notice regime affected by major change
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