In our October 2014 newsletter, Paul discussed the increasing use by the Australian Taxation Office of the practice of issuing notices under section 260-5 of Schedule One of the Taxation Administration Act (TAA), otherwise known as Garnishee Notices to collect outstanding tax liabilities.
In that article, Paul discussed the effect of the Garnishee Notice, gave examples of taxpayers who had Garnishee Notices issued against either their bank accounts or against funds owed to them by debtors, and the effect that these Notices had on the operation of their businesses.
By way of summary of Paul’s article:
- A Garnishee Notice requires that the recipient pay the ATO the amount set out in the Notice.
- A Garnishee Notice creates a statutory charge over moneys held on behalf or owed to the taxpayer.
In this month’s newsletter, we are taking a look at the powers of the Commissioner of Taxation to issue garnishees beyond the company’s bank account to recover the ATO’s outstanding debts.
Extension of Avenues of Recovery
The powers of the Commissioner go well past simply relying on the recovery from cash at bank or attaching to major debtors.
Many businesses facing financial difficulties rely on overdraft facilities to fund their business, and as such there is no cash at bank for the Commissioner to seize. Further, many businesses such as retailers, do not offer accounts and instead deal solely with cash or credit card transaction sales. So, faced with these circumstances how does the Commissioner recover unpaid taxes by using a Garnishee Notice?
There are a number of other avenues of recovery that can be targeted by the Commissioner:
- Credit Card Merchant Facilities – Many businesses transact using Merchant Facilities for Credit and Debit card transactions, either in store or online. Online transactions may also use third party transaction providers, such as Pay Pal, to arrange payment for the sale of goods. The Commissioner may use the garnishee power to direct the financial institution or payment provider who holds the funds arising from these transactions to pay the Commissioner directly with no funds remitted to the taxpayer’s account. Given the increased use of these transactions as opposed to cash, such enforcement action would have a significant effect on the taxpayer’s cash flow.
- Sale of Mortgaged Land or Property – It is not unusual for a taxpayer who holds equity in either land or property, to decide to sell these assets to inject the equity into the taxpayer’s business.In reality the purchaser will require clear title to the land or property when completing the transaction. Under such circumstances, it is likely that the Notice will only apply to the surplus funds from the sale of the land or property, the result of which could prevent the taxpayer from injecting much needed capital into the taxpayer’s business. In the circumstance where the Commissioner has evidence that the purpose of the mortgage was to defeat the Commissioner’s claim, the Commissioner will require payment of all or part of the purchase price from the purchaser. The Commissioner may serve a Garnishee Notice on the purchaser of the land or property and pay the full purchase price to the Commissioner, notwithstanding that the land or property is subject to a mortgage that pre-dates the Garnishee Notice.
- Superannuation Funds – Where the taxpayer is an individual, a garnishee may be served on a superannuation fund. In the event of such service, the taxpayer should note that the notice is not effective until the rules of the fund are satisfied, that is the taxpayer retires or dies. Generally, service on a superannuation fund will request payment in a lump sum, however, where a retirement income stream will guarantee repayment within a satisfactory period of time, the Commissioner will be entitled to receive the income stream. Insolvency differs to Bankruptcy where superannuation is not divisible property available to creditors; the Commissioner tested this avenue of recovery in 2013 (Denlay v Commissioner of Taxation). In the above matter, the Federal Court quashed the garnishee. However, this was largely due to the fact that other avenues of recovery by the Commissioner had been stayed in the Court and there was a strong chance the plaintiffs were likely to become bankrupt. Notwithstanding this, the Commissioner’s policy remains unchanged.
Legally the obligations created by a Garnishee Notice continue to apply until either the third party upon whom the Notice is served pays to the Commissioner the total debt or they are subsequently notified by the Commissioner that the Garnishee Notice is withdrawn.
As you can see, the issue of a Garnishee Notice has wide ranging implications for both Corporate and Individual taxpayers. It is likely in these times of reducing Government revenue that there will be an increase in the activities of the ATO to collect outstanding debt.
Again, we can only reiterate our previous advice. If the Commissioner starts recovery action, it is imperative your client should obtain specialised advice by contacting Shaw Gidley, either at the Port Macquarie office on (02) 6580 0400 or the Newcastle office on (02) 4908 4444 for a free and confidential assessment of their situation.