Garnishee Notices
A garnishee notice is a document sent by the ATO to a third party that owes or holds money to or for tax debtor which demands payment for unpaid tax debt where initial attempts have failed;
What are they?
- issuing of a garnishee notice
- a garnishee notice will be issued in the following circumstances when:
- the tax debtor does not pay a tax obligation and fails to take reasonable steps with the ATO to resolve this dispute;
- the tax debtor has repeatedly defaulted on its agreed ATO taxation payment plans;
- the tax debtor has shown that they are not willing to work with the ATO to resolve the dispute;
- the tax debtor seems to be engaging in illegal phoenix activities; and
- the tax department has detected deliberate and ongoing avoidance in relation to an ATO audit;
- authority of issuing
- ATO have the authority to issue a garnishee notices pursuant to the powers given to them under Section 260-5 of Schedule 1 of the Taxation Administration Act 1953 without the order from a court;
- ATO also have the authority to serve a written garnishee notice on any third party if the third party owed or hold money on behalf of the tax debtor;[1]
- debts which subject to a garnishee notice
- a garnishee notice can be issued for:
- a tax debt;
- a judgment given on a tax debt;
- the ATO’s costs of obtaining judgment on a tax debt
- portion of funds which subject to the garnishee notice
- for a point in time garnishee notice, the ATO can acquires a once off amount which usually the lesser amount of the full tax debt or a 30% of the balance in the account from the tax debtor’s banks;
- for a continuing garnishee notice, usually the full amount of the tax debt from the tax debtor;
- reach of a garnishee notice:
- ATO can issue a garnishee notice to the following:
- a contractor who owes money to a tax debtor and other trade debtors;
- an employer who owes money to a tax debtor;
- banks, financial institutions and building societies where the tax debtor has accounts;
- people involved in the sale of land or property from a tax debtor;
- solicitors or accountants holding funds in trust on behalf of a tax debtor;
- an Australian company in which a tax debtor is a shareholder;
- the suppliers of merchant card facilities;
- a self managed superannuation fund where the ATO issued a garnishee notice relating to monies being paid to the Denlays from their superannuation fund; [2]
- ATO can issue a garnishee notice to the following:
- a garnishee notice can be issued for:
- a garnishee notice will be issued in the following circumstances when:
Types of Garnishee Notices
- point in time
- point in time notices are notices which demand a single one-off payment;
- a point in time notice also authorises a single payment from the third party of the tax debtor;[3]
- for example, the ATO can acquires a once off amount which usually the lesser amount of the full tax debt or a 30% of the balance in the account from the tax debtor’s banks;
- continuing
- continuing notices are notices which demand continuous payment from a third party where a continuous payment of a percentage of any money held on behalf of a tax debtor at the time of the notice is paid to the ATO;
- ATO also have the right to future money of the tax debtor;
- an ongoing notice may nominate a period to which it applies for instance for three months and after its date of issue, the notice is no longer valid and the third party should not longer make any transfers to the ATO;
Types of Accounts
- salary and wages:
- the ATO will not usually seek to garnish more than 30 cents in the dollar of the amount of salary and wages payable;
- a higher percentage may be imposed where the tax debtor has another source of income or where the tax debtor’s financial position indicates that it would be fair and equitable to do so; and
- a lower percentage may be sought where the tax debtor’s income is already subject to another garnishee;
- medicare Australia payments
- Medicare Australia will be informed to disregard the application of the garnishee in respect of “pay doctor cheques”;
- centrelink or Department of Veterans’ Affairs benefits
- the Commissioner of ATO will not garnishee Centrelink or Department of Veterans’ Affairs pensions or benefits, unless requested to do so by the tax debtor;
- taxation appeals
- the Commissioner will consider whether a garnishee would significantly prejudice the tax debtor’s rights where a tax debtor is appealing to a tribunal or court against the assessment that raised the debt;
- purchaser of mortgaged land or property
- the purchaser’s obligation in relation to garnishee supersedes the obligation or discretion to pay money to a secured creditor in accordance with the tax debtor’s instructions;
- where a garnishee notice is served on the purchaser of mortgaged land or property, the garnishee will attach that part of the purchase price which is necessary to pay out the mortgage;
- where there is evidence that the purpose of the mortgage was to defeat the Commissioner’s recovery powers, the ATO will require payment of all or part of the purchase price from the purchaser;
- bank account
- the obligations created by a garnishee notice continue to apply until either the third party pays to the Commissioner the total debt or the Commissioner subsequently notifies the third party that the garnishee notice has been withdrawn;
- some garnishee notices may themselves specify that the third party’s obligations are discharged at an earlier time and no obligation continues after the debt to which the notice refers is met;
- superannuation fund
- the garnishee notice will not be effective until the tax debtor’s benefit are payable under the rules of the fund;
- a notice served on the fund will generally request the payment as a lump sum unless the anticipated retirement income stream can guarantee repayment within a satisfactory period of time;
- life insurance policies
- a garnishee notice can be served in respect of the proceeds of life insurance policies but the notice will not take effect until the tax debtor dies or the monies otherwise become payable under the policies;
- trust funds
- a garnishee notice may be served on a professional such as solicitor or accountant, who hold funds on trust for a tax debtor but the notice may not be effective if all such monies have become charged by a lien;
- shares
- a garnishee notice may be served on a company in which a tax debtor holds shares and would then entitle the Commissioner to receive any dividend payable to the tax debtor in respect of the shares;
Adverse Consequences
- credit rating
- ATO will not report the tax debtor’s debt information to credit reporting bureaus (CRBs) if they are already engaged with ATO to manage their tax debts;
- for business tax debts, ATO may disclose the tax debtor’s debt information to CRBs if:
- the tax debtor has an Australian Business Number (ABN) and are not an excluded entity which includes the following:
- deductible gift recipient;
- complying superannuation fund;
- registered charity; and
- government entity;
- the tax debtor has one or more tax debts and at least $100,000.00 is overdue by more than 90 days;
- the tax debtor is not engaging with ATO to manage his tax debt;
- the tax debtor does not have an active complaint with the Inspector General of Taxation Ombudsman about ATO’s intention to report his tax debt information
- the tax debtor has an Australian Business Number (ABN) and are not an excluded entity which includes the following:
- ATO will not report the tax debtor’s debt information even if it is $100,000.00 if the tax debtor is effectively engaging with ATO to manage his debt;
Defences
- Withdrawn
- ATO may agree to withdraw a garnishee notice in certain situations as follows:
- when the tax debtor makes a suitable alternative arrangements for payment;
- when the tax debtor is effectively engaging with ATO to resolve his tax debts;
- Payment plan
- an ATO payment plan is an agreement between the tax debtor and the tax office which allows the tax debtor to pay the outstanding tax in instalments;
- there are usually some conditions attached to the payment plan;
- there are number of different payment plan that a tax debtor can enter into, based on the circumstances of the tax debtor’s particular situation;
- a tax debtor can negotiate with the ATO depends on several different factors as below:
- the amount of the debt owed to the ATO;
- the amount of money a tax debtor can afford to pay;
- whether the tax debtor is able to provide a security to the ATO;
- the tax debtor’s compliance history with the ATO
- ATO may agree to withdraw a garnishee notice in certain situations as follows:
Tips and Traps
- When a tax debtor received a garnishee notice from the ATO, this will have been issued at the same time as the notice provided to the third parties involved in the recovery of funds, so the tax debtor should:
- Check whether the ATO’s claim is valid;
- directly defend the notice;
- negotiate a payment plan with the ATO;
- challenge the notice; and
- the sooner the tax debtors act, the sooner they can get back to business as usual
[1] Section 260-5(2) of the Taxation Administration Act 1953.
[2] Denlay & Anor v FCT (2013) ATR 299.
[3] Section 260-5(4)(a) of Schedule 1 of the Taxation Administration Act 1953.