How do you respond to an ATO garnishee notice?

Summary: what is a garnishee notice?

A garnishee notice is an order issued by the Australian Tax Office (ATO) to a third party who currently holds or may hold funds in future for the debtor to pay an amount related to the debt directly to the ATO, circumventing the debtor. Put simply, the ATO is ‘garnishing’ your financial entitlements in lieu of your failure to pay tax debts.

A garnishee notice is one of the strongest coercive forms of debt recovery at the ATO’s dispense. It is valid on debts due (although they need not be payable), and can be issued for any type of tax debt owed by an individual or a business, such as personal income tax, GST, PAYG, or Director Penalty Notice debts.

Before issuing a garnishee notice, the ATO should take into consideration:

  • your financial position and circumstances
  • any steps taken to make prompt payment
  • other debts owing
  • risk to their revenue (i.e. their position of preference in relation to other creditors)
  • the impact on your family and/or business.

There are two types of garnishee notice: a one-off ‘point in time’ notice, or an ongoing (standard) notice.

A one-off notice will require a single payment from the third party, and after the payment is made, the order will immediately cease to have any force. This type of notice will usually seek full payment of the tax debt, or 30% of the balance in the account targeted, whichever is lesser.

An ongoing notice will require regular payments from the third party, up to a maximum (usually the full amount of the tax debt). It may nominate a period of time for which it applies (e.g. 3 months), after which time it will cease to be valid.

Background

In recent years, there has been a reported increase in the issuing of garnishee notices by the ATO. A Four Corners program from April 2018 uncovered the “financial ruin” suffered by taxpayers who had received these notices and explored the problematic ‘performance based’ management of ATO employees.

The Inspector General of Taxation, Ali Nooroozi stated in 2015 that the use of garnishee notices was among the top three complaints raised about the ATO’s practices, and that taxpayers were concerned about a lack of procedural fairness and proper investigation occurring prior to the issue of the notices.

Small-to-medium enterprises (SMEs) are particularly vulnerable to garnishee notices, with business tax debts of around $100,000 being high on the ATO’s priority list.

Who receives a garnishee notice?

A garnishee notice may be issued to any third party who currently holds funds for a debtor, or may hold funds for the debtor in the future.

For tax debts owed by individuals, the main targets are:

  • Your employer or contractor
  • Your bank, financial institution, or building society
  • People who owe money to you from the sale of real estate (i.e. purchasers, real estate agents, solicitors)
  • Your insurer (where you are receiving a policy payout)
  • Companies in which you hold dividend returning shares

For tax debts owed by businesses, the main targets are:

  • Your financial institution
  • Trade debtors
  • Suppliers of merchant card facilities
  • Clients

When one of these parties receives a garnishee notice, you (the debtor) will also receive a copy. If you are a business, this copy will be sent to the director, and not your accountant.

The ATO cannot issue a garnishee notice over Centrelink or Veterans Affairs payments, or superannuation funds before they are accessed (i.e. on retirement or death).

Why has a garnishee notice been issued?

Garnishee notices are issued as an exercise of ‘stronger action’ in debt recovery from the ATO where the debtor:

  • has demonstrated unwillingness to work with the ATO (i.e. by ignoring communications and letting liabilities compound)
  • has repeatedly defaulted on agreed payment plans
  • does not have the capacity to pay and fails to take steps to resolve their situation
  • has been subject to an audit where deliberate avoidance was detected and payment avoidance continues
  • appears to be engaging in phoenix activities

There is no requirement for the ATO to give you notice before they issue a garnishee notice on your creditor/s. They have the right to issue these notices under law, pursuant to section 260-5 Sch 1 of the Tax Administration Act 1953 (Cth).

You can avoid being issued with a garnishee notice in the first place by engaging in good financial practice: paying taxes and bills on time where possible (and communicating with the creditor when it is not), spreading liabilities and not letting debts to a single creditor get too large, and keeping current and accurate financial records.

What happens after I receive a garnishee notice?

A garnishee notice is a notification of the ATO’s intent to act – it is not a request or a warning, and it can be difficult to contest once it is issued. Businesses that are hit with a garnishee notice often experience damage to their cash flow and significant interruptions to trade.

Failure to comply with a garnishee notice is a criminal offence, carrying 20 penalty units (equivalent to a fine of $3,600), and if convicted, liability to pay the full amount detailed in the notice. If the third party issued with the garnishee notice fulfils it, the payment is taken to have been authorised by the debtor.

If a garnishee notice is issued, and the debtor is subsequently declared bankrupt, the ATO can continue to deduct funds according to the garnishee notice even during the period of bankruptcy.

How can I challenge a garnishee notice?

If you have been issued with a garnishee notice, it is important that you act quickly, and maintain open lines of communication with your bank and the ATO. If you demonstrate a willingness to cooperate and negotiate a payment plan, the ATO is often willing to waive the notice in order to come to a mutual agreement. Your garnishee notice should specify an adviser at the tax office with whom you can speak directly about the matter.

The first step to formally challenging a garnishee notice is to consider whether there are any ‘special circumstances’, stays of judgment, or ambiguity in the written notice which may automatically invalidate it. Failing this, the notice can be challenged by anyone with an interest in the matter, on the basis that it has been issued for an improper purpose, or in bad faith. However, the underlying tax assessment that forms the foundation of the notice may only be challenged in proceedings (via an application to the court) under Pt IVC of the Tax Administration Act 1953 (Cth). The decision to issue the notice is subject to judicial review in the Federal Court.

A garnishee notice will be ineffective if the funds are held in a joint account, foreign currency, or if the notice is issued to the official trustee in bankruptcy.

Best practice in responding to a garnishee notice

Garnishee notices are designed as a last resort strategy in cases involving significant tax debts and uncooperative debtors, and should be taken very seriously. They can be embarrassing, or even damaging, as they drag third parties into your personal financial affairs.

To avoid receiving a garnishee notice, keep on top of your taxes by making budgets, business plans, paying your debts as they become due and payable, and keeping thorough financial records. If you begin to lose control of your finances and find yourself unable to keep up with tax debts, it is important to reach out to the ATO (without volunteering unnecessary information) to try and resolve the dispute before you are issued with a garnishee notice.

If you have already been issued with a garnishee notice or are concerned about a tax debt, you may wish to engage the advice of a professional. Sewell & Kettle Lawyers have extensive experience in detailing with the ATO and helping clients regain control of their debt situation. For more information, contact us.

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